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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?