Increasing GSE Fees

Fannie Mae and Freddie Mac offer a guarantee that mortgage payments will be delivered to investors, and they charge fees to cover the risks inherent with these promises. But they don’t charge enough. At least that’s the word from GSE regulator Edward DeMarco, the acting director of the Federal Housing Finance Agency.

As reported by National Mortgage News last week, DeMarco wrote a response letter to Rep. Scott Garrett (R-NJ) that claimed: “The high upfront fees Fannie Mae and Freddie Mac charge on certain single-family loans still do not ‘fully cover’ all the costs and risks associated with those loan guarantees.”

One option is to require more private mortgage insurance (PMI) on originated loans. This would mean the mortgages would carry less risk for the GSE’s and, by default, the taxpayers who are covering all of their losses. But DeMarco writes that the PMI industry isn’t fiscally sound and “remains at risk of being unable to meet all future claims on existing business.”

Another option would be to just raise the fees. The downside is that this would cause the already frustrated realtors, mortgage bankers, and homebuilders who haven’t liked how the fees have been raised over the past year to be even more irate. Actually, that is the upside.

The more frustrated lenders are with the prices the GSEs are charging for their guarantee, the more likely they are to sell their mortgages to private investors. Currently Fannie and Freddie dominate over 90 percent of the secondary market, but with higher fees, there will be room for the private sector to chip away at this monopoly.

In fact, this would be one way to slowly work the GSEs completely out of the market. Additional fees charged by the GSEs would make selling to them progressively unappealing—and at the same time it would help cover the risks associated with guaranteeing mortgages and maybe even recoup some of the taxpayer losses. Hypothetically, the GSEs could phase in a 1/2 point fee (in addition to what is already charged) starting later this year, and let it rise by a 1/2 point every six to twelve months after that as a way of trying to create a wedge for private capital to out compete the GSEs. Eventually selling to the GSEs would be so expensive that they couldn’t do business any more. An in theory at that point we wouldn’t need them to do business anymore.