Since 2011, the government-sponsored enterprises’ average combined guarantee fees have nearly doubled.
Last year, the g-fee hike was due to legislation designed to offset temporary reductions in federal payroll taxes and the Federal Housing Finance Agency’s initiative to increase private investment in mortgage credit risk.
Going forward, the FHFA plans further enterprise g-fee increases to spur private capital, but it’s not yet clear how high the conservator must increase such fees to achieve its objectives, according to the latest report by FHFA’s Office of Inspector General.
In 2012, Fannie Mae and Freddie Mac generated $12.5 billion in revenue from the single-family guarantee fees that they charge to protect investors in their mortgage-backed securities against potential credit losses.
The FHFA argues that federal financial support for the GSEs over the years has permitted both to set their g-fees at "artificially low levels," thereby increasing the risks and competitors out of the market.
This has caused the Office of Inspector General to assess the effect g-fee hikes will have on the housing finance system and whether this will hinder a private sector comeback.
"FHFA has not yet defined what it means by ‘increased private sector investment in mortgage credit risk’ or developed measures thereof. The term could mean something as limited as a greater willingness on the part of lenders to hold mortgages in their portfolios rather than sell them to the Enterprises," the Office of Inspector General explained in its latest report.
The report continued, "Alternatively, it could mean something as far-reaching as a revival of the private-label mortgage-backed securities (PLMBS) market."
Without a specific definition the FHFA will encounter challenges that may counteract its initiative, including a significant increase in g-fees — under some scenarios — could result in higher mortgage borrowing costs and dampen both consumer demand for housing and private sector interest in credit risk.
Additionally, certain federal regulatory initiatives, while designed to combat unfair lending practices, could have a potential trade-off, such as limiting private sector incentives to invest in more credit risk.
As a result, the OIG suggests FHFA should seek to establish a more formalized agreement with the Federal Housing Administration to assess key issues in the mortgage finance system.
"FHFA may realize additional benefits by seeking to establish a more formal working relationship with FHA and jointly assessing the key issues that may affect their pricing initiatives," the report noted.
For instance, the agencies could assess the potential implications of the Department of Housing and Urban Development’s recent decision to halt further FHA premium increases even as FHFA continues to raise its g-fees.
A pricing disparity between g-fees and insurance premiums could shift a portion of the enterprises’ mortgage business and the associated risks to FHA without an overall increase in private capital.
"We recommend that FHFA establish definitions and performance measures for its initiative to raise Enterprise guarantee fees as a means to increase private investment," according to the OIG.
"We also recommend that FHFA assess the feasibility of establishing a formal working arrangement with FHA to assess critical issues involving their pricing initiatives," the report concluded.
