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‘Far Too Early’ to Know Impact of GSE Framework

Bloomberg reports that the Federal Housing Finance Agency’s (FHFA) [1] framework for Fannie Mae and Freddie Mac could mean higher costs for many borrowers, possibly burdening less-wealthy borrowers and those with lower incomes. 

Bob Ryan, a former senior FHFA adviser until mid-2019, told Bloomberg that mortgage rates would have to rise between 0.15 and 0.2 percentage points on average to meet the proposed capital requirements set forth by FHFA Director Dr. Mark A. Calabria. 

The report adds that higher interest rates could weigh most heavily on borrowers with lower credit scores and smaller down payments, according to Moody’s Analytics Chief Economist Mark Zani. 

“In a stressed economic environment, those borrowers might see rates as much as half a percentage point higher than they otherwise would,” Zandi said in the Bloomberg piece. “That would mean, for example, that someone with a $200,000, 30-year mortgage would pay an additional $58 a month if their interest rate was 4.5% rather than 4%.”

“It’s confusing to me,” Zandi said of the proposed rule. “I’m not really sure who benefits from this. I’m not even sure it helps their goal of privatizing” Fannie and Freddie.

FHFA spokesperson Raphael Williams told DS News that it is “far too early” to speculate on re-proposed capital rule’s [2]impact on the GSEs. 

“The FHFA continues to work with its financial advisor on the roadmap to exit conservatorship. Making the re-proposal public enables engagement with capital markets participants and providers of capital to really assess the re-proposed rule and its impact on a number of key items, such as guarantee fees, in addition to gathering public comment on the rule during the comment period,” Williams said. 

Williams added that input from the market and the public, and the returns necessary to attract that capital, is necessary to better understand how the rule impacts guarantee fees. 

“As it stands today, we do not have industry and market input yet, so anyone saying what GSEs will look like are making grand assumptions,” he said. “Post-financial crisis experience suggests that the enhanced regulatory capital requirements in the U.S. banking system and the U.S. private mortgage insurance industry have not resulted in a significant increase in borrowing cost or reduced access to credit, and they have provided for more resilient markets.”

Williams added that the re-proposed rule will not be finalized until later in the year, with the comment period running through mid-august, depending on when the rule is published. 

“The proposed rule is very different than the 2018 proposal, and therefore care should be taken with impact analysis based on simplistic comparisons,” he said.