Mortgages rates on conventional loans could change in the coming months. The Federal agency that regulates the GSEs, the FHFA, is re-evaluating the fees that it allows Fannie Mae and Freddie Mac to charge consumers. With mortgage rates expected to rise in the coming years and looming changes at private mortgage insurers, the outcome of the FHFA’s review could either compound headwinds for the housing market or broaden access to the conventional market.
The FHFA took comments from the public in early September as to whether the current fee structure is appropriate. Last fall, the former director of the FHFA announced an imminent increase in these fees prior to his departure. However, the new Director, Melvin Watt, called for a review of the fees and their impacts on consumers, the GSEs, and the market, which included questions suggestive of a potential reduction in g-fees.
The GSEs don’t originate mortgages. Rather, they package loans into mortgage backed securities (MBS) which they then either swap back to the banks or companies that provide the GSEs with loans or the MBS are sold to the public. The GSEs also provide a guarantee that a buyer of the MBS will receive the full and timely payment from the MBS making the MBS and loans packaged in it more attractive to the investor. This guarantee comes with a fee that is passed onto the consumer. The GSEs pass this charge onto the consumer in three types of fees: a base g-fee that is the same for all borrowers, a loan-level pricing adjustment (LLPA) that rises or falls based on the individual consumer’s risk factors (e.g. FICO, LTVs, etc.), and an adverse market delivery charge (AMDC) which reflects the risk of the local housing market in which the consumer is purchasing.
The changes proposed last fall by former Director Ed DeMarco included:
- A 10 basis point increase (e.g. 0.1% increase in rate) in the guarantee fee for all borrowers
- The current AMDC of 25 bps that applies to all markets would be dropped except for in Florida, Connecticut, New York, and New Jersey
- Finally, a range of fees that apply to specific individuals would increase based on the borrower’s specific FICO score and down payment (LLPAs)
Taken together, these changes would raise costs for every buyer, but most significantly for buyers with a down payment less than 40% and a FICO score between 680 and 740. For some borrowers rates would rise by half a percentage point.
However, Director Watt has hinted at making changes that would help to stimulate mortgage access for borrowers with less than perfect credit and for middle-class Americans. Questions in the FHFA’s request for comment on the matter hinted at a flatter fee structure that would reverse the trend of higher fees for riskier borrowers. Some have argued that as entities fully backed by the Federal government, the GSEs should focus their mission on expanding credit by accepting a lower return on equity than a private MBS guarantor would. A flatter LLPA structure could reduce fees to a significant share of consumers, while a reduction in g-fees would benefit all consumers. As depicted above, the changes proposed in the fall (blue) would raise costs for all borrowers, while a flattening of the structure (red)  could provide modest relief for 50% to 80% of conventional borrowers . For example, a prime borrower with a FICO score between 700 and 719 with a down payment of 5% to 10% would face an increase in monthly payment of $45 under the proposed plan, while a flattening of fees could reduce the cost by $26 or more. The number of consumers that benefit from a flattening of fees could rise if lower pricing draws consumers away from costly FHA insurance.
However, lower fees could also have no impact to consumers if private mortgage insurers (PMIs) raise fees by an offsetting amount as a result of changes also proposed by the FHFA. The GSE’s charter requires PMI on all loans with less than 20% down payment. PMI takes the first loss when these low down payment loans go into default. Several PMIs had issues during the housing downturn and are still paying back insurance claims long overdue to the GSEs. In response, the FHFA imposed the LLPAs and AMDC fees beginning in 2008 in part to shore up losses as the PMIs weakened, essentially taking over the PMI role. To bolster the PMIs and to prevent future losses at the GSEs, the FHFA is reviewing rules that could require the PMIs to hold more capital against potential losses.  Holding more capital increases costs to the PMIs, costs which are passed on to consumers. Compounding the issue is the fact that the PMIs require a higher return on equity for capital than the GSEs. Thus, a reduction in fees charged by the GSEs, could be offset by an increase in fees charged by the PMIs, or worse if the FHFA does not reduce its fees and/or the PMIs require high returns.
To gauge the impact of a reduction in rates charged by the GSEs, participants in NAR’s 3rd Survey of Mortgage Originators were asked whether a reduction in LLPAs targeted at lower FICO and/or higher LTV borrowers would help to expand access to credit. A robust majority of 80% felt that a reduction in rates would help to expand the credit box, while 20% felt that there would be no change.
The economy has shown steady improvement in recent months and most economists agree that this portends an increase in borrowing costs ahead. NAR forecasts the average 30-year mortgage rate to rise nearly a percentage point to 5.1% in 2015  and potential changes at the PMIs could exacerbate this increase. Entry level and minority homebuyers have been slow to join the housing recovery in this low rate environment. With rates forecast to rise, reform of GSE fees may help to improve their participation in housing.
 This is hypothetical example where the AMDC is eliminated and LLPAs for borrowers with less than 30% down payment are reduced to resemble those with a down payment of 30.1% to 40%. Thus borrowers with 35% and 5% down payments would face the same fee if their FICO scores are the same. LLPAs would vary by FICO score according to the current schedule for a borrower with a down payment of 30.1% to 40%.
 Based on estimates of current market GSE market share by Moody’s Analytics https://www.economy.com/getlocal?q=B97EB9C4-9876-47F9-AB47-527469375F89&app=eccafile
 Most of the PMIs have significantly improved their financial footing and argue for reduced LLPAs for that reason alone.