G-fee debate revived in request for comment on mortgage pricing

The latest revamp of loan fees at government-sponsored enterprises Fannie Mae and Freddie Mac drew its share of critics, leading their regulator to ask whether it should rethink the capital framework driving them — and it looks like the answer, in some cases, is yes.

To be sure, many critics, including Republican legislators who've sought to roll back the latest pricing change, have balked at the idea of overturning loan-level risk-based pricing in response. But not everyone has, and comment letters released recently confirm there are mixed opinions.

Specifically, some affordable housing advocates are reprising past calls for a return to an alternative used prior to the Great Recession: a flat guarantee fee based on portfolio-based cross-subsidization rather than the current loan-level tradeoffs.

"We do not support risk-based pricing at the loan level by the enterprises," said David Dworkin, president and CEO of the National Housing Conference, expounding on the view in his group's letter to Fannie and Freddie's regulator.

"That's different from private mortgage insurance, which involves risk-based pricing. We have no objection to risk-based pricing at the portfolio level," Dworkin clarified. "We're not against risk-based pricing, we're against individual consumers paying for their own risk."

The most recent pricing changes were well intended, but the GSEs shouldn't "pick winners and losers" among borrowers if it involves charging those with less income higher fees, potentially driving to the neighboring government-backed market and increasing taxpayer risk, he said.

And while by one measure used by the GSEs, the Enterprise Regulatory Capital Framework, they are undercapitalized, the NHC said more realistic measures like stress tests suggest there's room to reduce capital enough to have a lower (but not excessively reduced) flat g-fee.

The letter references a recent stress test measure that shows that the largest loss the GSEs would take in a "severely adverse" scenario (with allowances for deferred tax assets) included is $8.4 billion. It contrasts it with the 2021 ERCF goal of roughly $319 billion in adjusted capital.

"Even if the losses from a future crisis with five times the impact of the 2008 financial crisis were to occur, costing the enterprises a total of $42.25 billion, under the ERCF they would be required to hold $276.75 billion in unnecessary capital," the letter said.

The ERCF goals are based more on what capital enterprises might need if they were released from their government conservatorship, and measured more by private market standards, whereas the stress tests aim to model likely risk on the enterprises in current form.

Dworkin called the ECRF number "extremely excessive.

"They're comparing them to a bank capital, but mortgages are a very small piece of what banks do and capital requirements for banks are really driven by much bigger investments that have much higher risk than mortgages," said Dworkin.

Dworkin also opposes a separate regulatory proposal that would increase risk weightings for some mortgages that have higher loan-to-value ratios and are held in bank portfolios. 

Following the Great Recession, the GSEs downsized their portfolios and shifted their focus to securitizations. Because of this, and rules that now hold lenders responsible for the borrower's ability to repay, Dworkin thinks the previous flat g-fee model wouldn't have the risks seen in '08.

But other respondents to the FHFA's request for input disagree.

"The cross-subsidization model, with full flat-pricing, does not work and was one factor in the failure of Fannie Mae and Freddie Mac in 2008," Ed DeMarco, president of the Housing Policy Council and a previous acting director of the FHFA, said in a letter to the agency.

"It creates market distortions, encourages inappropriate risk-taking, and misleads consumers by removing beneficial pricing signals," he added.

DeMarco upheld the current capital framework at the enterprises but, like Dworkin, was critical of the proposed changes to bank standards.

While a kerfuffle has arisen over some of the most recent revisions to pricing at the GSEs, most notably a proposed debt-to-income-based differentiator that they eventually dropped, DeMarco indicated some types of loans are appropriate to apply a premium too, subsidizing others.

"Loans that are neither central to Fannie Mae and Freddie Mac's public mission and that are capable of obtaining private sector financing may be suitable for higher targeted returns," he said.

Cash-out refinance, investment property, high balance and second home loans fall into this category, he said. 

(Other groups, notably the National Association of Mortgage Brokers, have opposed the cash-out refi price hikes. The Community Home Lenders of America initially showed some resistance to the fees for high balance loans, but were later said it was mollified by an adjustment to the threshold for them that helped middle-income borrowers.)

While price changes can be disruptive to the industry, the HPC indicated that there is a need for regular updates to them, which should be made with adequate consideration for the operational burden involved.

"FHFA should reconsider the upfront fees every one-to-three years, depending on changing economic conditions, any changes to ERCF, and the results in the annual g-fee study," DeMarco said. "Pricing realignments should always reflect the level of risk to the Enterprises and the capital required to support that risk.

"Further, adequate notice should be provided to the industry to execute pricing changes, with substantial transition time during periods of high production volume or adverse market conditions," he added.

Other trade groups, while accepting of the need for changes in line with the current capital framework and thankful for adjustments the FHFA has made for their needs over time, also noted they can take an operational toll on mortgage companies and should be limited.

"Frequent pricing changes can pose a cost and resource burden on lenders, particularly with respect to necessary IT changes," the Community Home Lenders of America said in its letter.

"CHLA would be comfortable if guarantee fees and LLPAs remained at the current levels for a

significant period of time — e.g. through the end of 2024," the group added.

The Community Home Lenders of America also said that it continues to oppose non-risk-based upcharges for loans.

"CHLA continues to be extremely critical of the Congressional action at the end of 2021 to renew the non-risk related 10 basis point Fannie/Freddie guarantee fee hike — with the proceeds of such fee collections being used solely to pay for non-housing federal expenditures," the group said.