The National Housing Conference (NHC) is calling on the Federal Housing Finance Agency (FHFA) to return to a flat guarantee fee (G-fee) structure, eliminating the current pricing grid that charges homebuyers different fees based on their downpayment. In a comprehensive letter submitted in response to FHFA’s Request for Input concerning Fannie Mae and Freddie Mac’s Single-Family Pricing Framework, NHC urged Fannie Mae and Freddie Mac (the Enterprises) to return to a flat G-fee for all purchase money mortgages on owner-occupied properties. Additionally, NHC called upon FHFA to reduce the Enterprise capital requirements based on accurate assumptions of real risk.
“Risk-based pricing through loan level price adjustments (LLPAs) has outlived its purpose,” said David M. Dworkin, President and CEO of the National Housing Conference. “To create a fair playing field for first-time homebuyers across all income levels, Fannie Mae and Freddie Mac should charge the same G-fee for everyone, as was the practice between 1938 and 2008, and as FHA loans do today.”
In its letter, NHC emphasized the need for a judicious equilibrium – excessively low G-fees can precipitate unfavorable outcomes like those witnessed in the 2008 financial crisis. Conversely, inflated G-fees can drive consumers to the government-backed GNMA market, increasing taxpayer liability and limiting choices for less affluent homebuyers.
Noting that two key factors influence the pricing of G-fees, capital requirements and return on capital, NHC expressed concerns that the current approach is overly complicated and places FHFA in the position of “unnecessarily picking winners and losers among housing consumers.”
“We strongly believe that loan-to-value (LTV) is equally ineffective as a risk measurement when considered without a wide range of compensating factors,” continued Dworkin. “All risk measurements, whether debt to income ratios, LTV ratios or credit score, to name a few, are somewhat predictive of individual loan performance. But none are meant to stand alone. Together they present a much better indication of loan performance, and this can be further mitigated by quality homebuyer counseling, competent risk management, and above all, responsible mortgage products.”
Further, NHC argued that the existing capital requirements are “unnecessarily high, designed to facilitate an administrative release from conservatorship that would leave the Enterprises less competitive, serve lenders less effectively, and deny many qualified homebuyers access to mortgage finance in all market conditions.”
NHC’s letter notes that the worst-case scenario assumes a total comprehensive loss of income of $8.4 billion. Yet under the ERCF, the Enterprises together would be required to hold approximately $319 billion in adjusted total 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 says.
NHC’s letter outlined that FHFA’s previous pricing grid penalized first-time homebuyers for lacking the multigenerational wealth that most Americans have been able to acquire through homeownership. The new pricing grid does the opposite, cross subsidizing the adjustments to make the earlier grid fairer by increasing fees on homebuyers who pose a lower risk of individual default, though not a lower risk of loss to the Enterprises.
“Neither model fully recognizes the risk mitigating benefits of private mortgage insurance (PMI), which is somewhat ironic given FHFA’s leadership in strengthening the PMI industry to ensure that this vital source of credit enhancement and counterparty risk is well-regulated and well-capitalized at an appropriate level for the actual risk of the mortgage products available in this channel,” said Dworkin.
To read NHC’s full letter to FHFA, including responses to specific questions, click here.
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