The Federal Housing Finance Agency (FHFA) has issued a Request for Input (RFI) on Fannie Mae and Freddie Mac’s single-family pricing framework. The RFI solicits public feedback on the goals and policy priorities that FHFA should pursue in its oversight of the pricing framework.
FHFA is also seeking input on the process for setting the GSE’s single-family upfront guarantee fees, including whether it is appropriate to continue to link upfront guarantee fees to the Enterprise Regulatory Capital Framework (ERCF), which was established in 2020, and has a significant impact on the risk-based pricing component of the GSEs’ guarantee fees.
“Through this RFI, FHFA seeks input on how to ensure the pricing framework adequately protects the Enterprises and taxpayers against potential future losses, supports affordable, sustainable housing and first-time homebuyers, and fosters liquidity in the secondary mortgage market,” said FHFA Director Sandra L. Thompson. “We are committed to being transparent and to considering views from a diverse set of stakeholders and market participants.”
Specifically, the FHFA requests public input on the following topics:
Return on Capital
- What is an appropriate long-term commercially reasonable return on capital threshold for the GSEs to achieve?
- To what comparable industries and companies should these return on capital thresholds be calibrated?
- Should FHFA set only minimum return thresholds for the GSEs, or a range of returns–including a maximum return target?
- For which loan characteristics and products should the GSEs accept a lower return?
- For which loan characteristics and products should the GSEs target a higher return?
- How should return on capital be calculated for the GSEs?
- With what frequency should FHFA consider updating the upfront guarantee fee grids?
Components of Guarantee Fees
- In achieving commercially reasonable returns over time, should future guarantee fee changes be executed through ongoing guarantee fees or upfront guarantee fees?
- Should upfront guarantee fees be eliminated?
- Should risk-based pricing be calibrated to the ERCF?
The GSEs charge guarantee fees to cover the costs of guaranteeing the securities they issue backed by the mortgages they acquire. An important component of the GSEs’ current single-family mortgage guarantee pricing is risk-based pricing, where certain guarantee fees may vary with the risk characteristics of a loan. To evaluate the risks they guarantee, the GSEs are now operating under the ERCF–a set of capital requirements established by FHFA through notice and comment rulemaking. The ERCF has a significant impact on the risk-based pricing component of the GSEs’ single-family mortgage guarantee fees. The GSEs have been required to meet specified return on capital thresholds for several years. In light of the significant increase in regulatory capital requirements and an updated view of the risk of different loan characteristics in the ERCF, FHFA in the 2022 and 2023 Conservatorship Scorecards for Fannie Mae and Freddie Mac instructed the GSEs to “Update the current pricing framework to increase support for core mission borrowers, while ensuring a level playing field for small and large sellers, fostering capital accumulation, and achieving viable returns on capital.
Guarantee fees are intended to cover the GSEs’ administrative costs, expected credit losses, and cost of capital associated with guaranteeing securities backed by single-family mortgage loans.
In 2022, the GSEs began using the ERCF for measuring the profitability of new mortgage acquisitions, among other purposes, and FHFA began taking a series of steps to update the GSEs’ single-family guarantee fee pricing framework to better align the pricing and capital frameworks. The updates are intended to increase support for creditworthy borrowers limited by income or by wealth, while ensuring a level playing field for small and large sellers, fostering capital accumulation, and achieving commercially reasonable returns on capital.
FHFA invites interested parties to provide written input, feedback, and information on all aspects of this RFI by August 14, 2023.