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Diane is an executive recruiter and talent acquisition professional for the mortgage industry . She has over twenty years in the mortgage industry as a wholesale AE and operations professional. You can visit her professional profile on LinkedIn. You can also follow her on twitter Follow @AExplode
In a speech at the American Mortgage Conference in Raleigh, NC this week, the director of the FHFA, Edward DeMarco, elevated Fannie and Freddie from mere GSE’s (government sponsored entities) to Enterprises. I could not help but picture a large Starfleet orbitting the planet and beaming up mortgage backed securities. The cost of intergallactic transport is about to get a little pricier, as both DeMarco and the Obama Administration have laid out plans to raise guarantee fees.
Very simply, these are fees charged by guarantors of mortgage backed securities, like Fannie and Freddie, to lenders for administrative and credit-related loss “insurance”. The way it works is that a percentage is deducted from the stated rate on a note, leaving the pass through or coupon rate, the difference being the profit. The planned increase is for 10 bps, which translates into an average $15 dollars per month on a new mortgage.
The administration calculates that the increase will raise a measly $28 billion dollars. The problem is that this move will probably create tighter credit policies that will in effect crush the market, since lenders will struggle to make a profit by selling pools of loans of increasingly higher quality and more overlays. So, if you thought credit was tight right now, it is about to get tighter than a crab’s you know what.
You might ask why the FHFA and the administration would do such a thing right now, with the state of housing and the fact that the Enterprises are the only securitization game in town? From everything I am reading, it appears that DeMarco believes that this move will encourage private investors to flow into the securitization market to fill the void left by the slowly exiting Fannie and Freddie.
I understand that director is trying to wean the mortgage industry off of the ailing starships, and do so without burdening the taxpayers further… but did he ever stop to think that the very taxpayers he is trying to protect are the same folks who own homes? Homes that are losing value due to increasing foreclosure rates. Homes that they cannot refinance or sell.
Don’t get me wrong, I am all for the government getting out of the mortgage business. Frankly (pun intended) the more they get their fingers out of the pie the better. But here is my second question: why does DeMarco believe that the private sector is going to be eager to step in and invest in the mess left in the wake?
For one thing, it will not be profitable and there will not be enough volume to make up for thin margins. The funny thing about investors is they like to make money. And small community banks are not going to be able to step up their lending due to the high cost of compliance caused by Dodd Frank; many are already exiting lending due to the onerous regs. Sounds like a perfect storm Mr. DeMarco.
President Obama, on the other hand, may not understand all of the implications of an increase in guarantee fees. For him this move is simply a revenue generator, and we all know he is busy checking under couch cushions in search of any loose change he can find. The $25 billion he expects to raise, however, is not worth the devastation it will cause to the industry and to the economy. When more and more foreclosures hit due to tighter credit and plummeting values…. all too familiar a song, right?
Provocative article… I have a few questions though.
First, how do we know that the increase in guarantee fee will not simply show up in retail rates? Are you suggesting that because of competitive pressures, originators will not be able to pass through the increase? I would be skeptical because of the market influence of the GSEs… why would the market want to take the cut in volume rather than simply passing through the cost? (I could be wrong though, I’m sure there’s plenty of data from recent increases, such as in FHA, that might shed light).
The second question is what do you suggest is done, as you say you agree for a lesser government role in the mainstream of the housing market over time? It seems like guaranty rates that correspond to the market are a basic thing needed — perhaps they should just be phased in more gradually, or we wait until the market has “stabilized”?
I do think it is weird that FHFA seems little interested in hearing from the parties that presumably would take over funding mortgages in a fully private market. I would think they’d want to convene the major players in the fixed income markets and ask what they would require to substitute for the role of Fannie and Freddie (perhaps in consortium)… I can’t imagine Bill Gross or Warren Buffett failing to give useful guidance when they are essentially being asked what they require to enter in and profit on a gigantic market they are largely out of now.
The increase will be borne by every new mortgagee, an average estimated $15.00/month, so yes it will pass right through. Most originators and borrowers will not even notice it.
Where it will be noticed and where the problem lies is not competitive pressures at the retail level, the problem is profitablity at the secondary level, which dictates credit policy. I know there is a contingency out there who scream for higher, tighter standards and more regulations….but on the other hand we are strangling the housing recovery with a very tight noose.
My suggestion, forget raising the guarantee fees. I don’t see any valid reason at this point to throw a monkey wrench in the works. Get rid of Dodd Frank, which is a worthless piece of legislation that was enacted for purely political reasons. That one move would do a great deal to encourage the private sector to ease back in as the FHFA eases out.
Thanks for the questions and the comment….who doesn’t want to be provocative every now and then?
Thanks for your answers.
Good point about secondary market profitability.
But I still don’t see why no one is calling for some sort of dialog with the industry players that would putatively make up the replacement for Fannie and Freddie… weird.
Thank you.
The only thing I can think is PERHAPS Mr. DeMarco, as director of the FHFA, is only concerned about the conservatorship of the GSE’s, and bringing them to an end. I don’t think anybody wants to step up and claim that they can “fix” the mortgage industry…no politiician anyway. Too much room for failiure.
[...] THE FHFA ENTERPRISE… THE FINAL VOYAGE By Diane Mesgleski – ML-Explode.com In a speech at the American Mortgage Conference in Raleigh, NC this week, the director of the FHFA, Edward DeMarco, elevated Fannie and Freddie from mere GSE’s (government sponsored entities) to Enterprises. I could not help but picture a large Starfleet orbitting the planet and beaming up mortgage backed securities. The cost of intergallactic transport is about to get a little pricier, as both DeMarco and the Obama Administration have laid out plans to raise guarantee fees. Very simply, these are fees charged by guarantors of mortgage backed securities, like Fannie and Freddie, to lenders for administrative and credit-related loss “insurance”. The way it works is that a percentage is deducted from the stated rate on a note, leaving the pass through or coupon rate, the difference being the profit. The planned increase is for 10 bps, which translates into an average $15 dollars per month on a new mortgage. [...]