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Regulatory Advocacy

Working Together to Reduce Regulatory Burdens
Regulation Summary
Agency Federal Housing Finance Agency
Rule Name Fannie Mae/Freddie Mac Guarantee Fees
Comment Due Date 09/08/14

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PowerComment

The Federal Housing Finance Agency (FHFA) is requesting input on proposed increases to guarantee fees (g-fees) that Fannie Mae and Freddie Mac (the Enterprises) charge lenders and whether raising these fees would adversely affect mortgage lending. The move is part of FHFA’s efforts to shrink the Enterprises’ footprint.

The Enterprises receive g-fees in return for providing a credit guarantee to ensure the timely payment of principal and interest to investors in Mortgage Backed Securities (MBS) if the borrower fails to pay. The MBS, in turn, are backed by mortgages that lenders sell to the Enterprises. The proposed changes were announced on December 9, 2013, and on January 8, 2014, Director Melvin L. Watt suspended implementation pending further review.

The proposed changes include an across-the-board 10 basis point increase, an adjustment of up-front fees charged to borrowers in different risk categories and elimination of the 25 basis point Adverse Market Charge for all but four states.

There are two types of g-fees: ongoing and upfront. Ongoing fees are collected each month over the life of a loan. Upfront fees are one-time payments made by lenders when a loan is acquired by an Enterprise. Fannie Mae refers to upfront fees as loan level pricing adjustments (LLPAs) and Freddie Mac refers to them as delivery fees. Both ongoing and upfront types of fees serve the purpose of compensating the Enterprise for providing a credit guarantee. The Enterprises have relied primarily on upfront fees to reflect differences in risk. Alternatively, the Enterprises could charge risk-based ongoing fees. The preference for charging lenders upfront fees is based primarily on operational considerations, as upfront fees are easier to implement. Very frequently, upfront fees are converted by the lender to an ongoing equivalent and reflected in the mortgage rate paid by borrowers.

The Enterprises charge g-fees to cover three types of costs that they expect to incur in providing their guarantee: (1) the costs that the Enterprises expect to bear, on average, as a result of failure of borrowers to make their payments; (2) the costs of holding economic capital to protect against potentially much larger, unexpected losses as a result of failure of borrowers to make their payments; and (3) general and administrative (G&A) expenses. Collectively these three costs are the estimated cost of providing the credit guarantee.

The Request for Input does not provide any specific recommendations; instead, it asks a series of 12 questions about how such fees are set and what their impact has been in the broader market. While the Leagues highlight several of the questions posed, we recommend you review the entire Request for Input and comment on any or all of the 12 questions.

The FHFA said it wants to ensure that the government-sponsored enterprises set fees at a level that cover the expected credit losses, the cost of capital, and administrative expenses — as well as turn a profit.