High GSE Loan Fees Keep Buyers on Sidelines

30.09.2014
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Fannie Mae and Freddie Mac are charging excessive loan fees, according to some industry groups, who claim it is time to stop overcharging borrowers who use conventional financing to buy a home.

It’s a theme many in the industry return to in comment letters the Federal Housing Finance Agency received in response to a “request for input” on setting guarantee fees.

Fannie and Freddie hiked their loan fees in reaction to the housing crash and the staggering losses they suffered. The fee increases were also due to the failure of several private mortgage insurance companies and other insurers not living up to their obligations to pay claims.

By statute, the government-sponsored enterprises must require private mortgage insurance when the loan-to-value ratio exceeds 80%. The homebuyer pays for the insurance, which provides the GSEs with first-loss protection.

But six years later, the GSEs and the Federal Housing Finance Agency still don’t recognize private mortgage insurance in setting G-fees.

The GSEs “should recognize the benefits of private MI and lender recourse as mechanisms that can reduce risk at the loan level,” the Mortgage Bankers Association wrote in an unsigned comment letter.

Currently there are situations where the combination of guarantee fees and loan-level price adjustment fees exceed mortgage insurance premiums, even though the insurance stands in a first-loss position, the group said.

“The result is that current credit pricing is higher than it needs to be and presents an unnecessary obstacle to home purchases,” the MBA said.

It also means “consumers are being charged twice for the same risk reduction,” said the U.S. Mortgage Insurers, a trade group that represents the private mortgage insurance industry.

Ron Haynie, the senior vice president for mortgage finance policy at the Independent Community Bankers of America, also noted that the GSEs give “virtually no value” to private mortgage insurance in their current pricing.

“This action by the GSEs unnecessarily drives up the cost of high LTV loans, and contributes to making access to lower-down-payment loans more difficult for creditworthy borrowers,” Haynie says.

The GSEs currently charge a 25 basis point adverse market delivery fee that was first put in place in 2008 due to rising defaults in the wake of the housing crash. On top of that fee, the GSEs add loan-level price adjustments, which are based on LTV ratios, credit scores and other risk factors. The adverse market delivery fee and price adjustments are paid upfront by the lender. Previously, the GSEs only charged a standard guarantee fee, which currently ranges from 50 to 58 basis points.

The MBA estimates the combination of the adverse delivery fee, standard G-fee and price adjustments exceed mortgage insurance premiums for a first-time homebuyer with a 740 credit score and a 5% down payment. When all these fees are financed into the loan, it can increase the borrower’s mortgage rate by 71 basis points, while mortgage insurance would increase the rate by 62 basis points.

“In light of the tepid purchase market recovery, the GSEs and FHFA should be mindful of the extent to which current pricing levels, particularly LLPAs, have priced many first-time homebuyers and low- to moderate-income borrowers out of the conventional housing finance market,” the MBA says.

Looking solely at the adverse market delivery fee and price adjustments, a homebuyer with a credit score of 700 to 719 applying for a $200,000 loan with a down payment of slightly less than 10% would need $2,313 in cash to pay those fees at the closing table, according to economists at the National Association of Realtors. But that homebuyer would most likely finance the cost into the loan because they need their cash for the down payment.

“First-time homebuyers and other traditionally underserved borrowers are more likely to make smaller down payments [and] have been disproportionately affected by the upfront LLPAs fees,” wrote Steve Brown, the president of the Realtor group.

“Given the need to encourage borrowers to return to the housing market, unnecessarily increasing borrowing costs for this class of homebuyers is irresponsible housing policy and impacts borrowers who are essential to our housing recovery.”

Former Acting FHFA Director Edward DeMarco raised the G-fee several times during his tenure in an effort to reduce GSE presence in the mortgage market and encourage the development of a private-label mortgage securities market.

Shortly after Rep. Mel Watt, D-N.C., was confirmed by the Senate last December to be the new FHFA director, he suspended his predecessor’s proposal that would have raised the basic G-fee by another 10 basis points.

Several commenters voiced their opposition to increasing the current level of G-fees.

“Given the precarious state of the U.S. economy generally, and the housing market in particular, increasing the G-fees at this time may further inhibit affordability and harm the market,” wrote Joe Pigg, senior counsel for mortgage finance at the American Bankers Association.

The National Association of Federal Credit Unions warned that raising G-fees would have a “negative impact” on the housing market.

“NAFCU believes reducing G-fees or keeping them at their current level is necessary to the continued recovery and stabilization of the housing market,” said Angela Meyster, regulatory affairs counsel for the credit union group.

But NAFCU, the MBA and others are specifically calling for the elimination of the 25-basis-point adverse delivery fee elimination.

“At a minimum, the adverse market delivery fee should be eliminated,” Meyster wrote.

In May, Watt signaled in a major policy speech that he would put greater emphasis on making credit more accessible to potential borrowers and move away from policies seeking to reduce Fannie and Freddie’s market presence.

Meanwhile, the mortgage insurance companies have strengthened their capital positions as the FHFA has proposed higher capital requirements for them. In addition, the FHFA has worked with the GSEs to revamp the mortgage insurance master policies that will enhance protection for Fannie and Freddie.

“With the implementation of new stronger capital requirements, along with changes to the MIs’ master policies that provide both the lender and the GSEs with more certainty regarding the claims payment process, the value of mortgage insurance as a first-loss position should improve and the GSEs should adjust their pricing to reflect that value,” the ICBA’s Haynie wrote.

 

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