In multiple comment letters to the Federal Housing Finance Agency (FHFA) on the GSE’s Single-Family Mortgage Pricing Framework, many are advocating for the elimination of the current pricing grid that charges homebuyers different fees based on their downpayment.
The average guarantee fee (G-fee) of Freddie Mac and Fannie Mae, the GSEs who currently finance nearly half of the $13 trillion-plus in outstanding first-lien single-family mortgages in the country, is among the most closely-watched numbers by housing finance policymakers and the mortgage lending industry. The G-fee covers projected credit losses from borrower defaults [1] over the life of the loans, administrative costs, and a return on capital.
In November of last year, the FHFA issued its annual report on their G-fees covering calendar year 2021 which found that the average G-fee across all products was 0.46% [2].
In a comment letter to the FHFA [3], the National Housing Conference (NHC) is calling on the FHFA to return to a flat G-fee structure, and for the elimination of the current pricing grid that charges homebuyers different fees based on their downpayment. Responding to the FHFA’s Request for Input (RFI) concerning Fannie Mae and Freddie Mac’s Single-Family Pricing Framework, NHC urged Fannie Mae and Freddie Mac to return to a flat G-fee for all purchase money mortgages on owner-occupied properties. Additionally, the NHC called upon FHFA to reduce the GSE 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 NHC [4]. “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.”
NHC emphasized the need for a judicious equilibrium, as 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 in the letter [3]. “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.”
NHC’s letter [3] notes that the worst-case scenario assumes a total comprehensive loss of income of $8.4 billion. Yet under the Enterprise Regulatory Capital Framework (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 [3].
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 GSEs.
“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.
Also commenting on the FHFA’s G-fees was the U.S. Mortgage Insurers (USMI) [5], an association representing private mortgage insurance (MI) companies.
“USMI welcomes the RFI as an opportunity to provide data, observations, and recommendations to inform FHFA’s work on policies and processes for the GSE Pricing Framework. As an association representing an industry that serves homebuyers with limited access to funds for large down payments, USMI fully supports Director Thompson’s consistent message that affordability and sustainability for borrowers and safety and soundness for the GSEs are not mutually exclusive. It is paramount that the GSE Pricing Framework be calibrated to best further the GSEs’ statutory mandates,” said Seth Appleton, President of USMI in the letter [5]. “The approach used by the GSEs to estimate future returns on low down payment mortgages with private MI coverage systematically understates expected returns and does not fully recognize the risk mitigating and capital benefits of private MI, thereby leading the GSEs to charge higher upfront fees than may be necessary on this mission-critical segment of the mortgage market.”
In its comments, the USMI recommends that the FHFA’s oversight of the GSE Pricing Framework should be based on the following principles:
- Maximize responsible homeownership opportunities for all home-ready borrowers, including those lacking large down payments, while striving to balance the safe and sound operations of the GSEs and broader housing finance system.
- Account for the risk mitigating and capital benefits of private MI as strong GSE counterparties that stand in the first loss position, and recognize the full value of post-2008 enhancements to the industry through the updated Private Mortgage Insurer Eligibility Requirements (PMIERs), stronger Master Policy contractual language, expanded underwriting guardrails, and quality assurance refinements.
- Reflect the real expected returns to the GSEs from low down payment mortgages covered by private MI to more accurately price mortgage credit risk and eliminate duplicative fees for first-time, low- to moderate-income (LMI), and high LTV homebuyers without additional subsidy.
- Promote a coordinated approach to government housing finance policy by closely collaborating with the U.S. Department of Housing and Urban Development (HUD) when reviewing and implementing changes to the GSE Pricing Framework to promote a consistent and coordinated approach to the federal government’s housing finance policy and prevent undue competition between government programs and the private sector.
- Utilize a transparent approval and implementation process with extensive stakeholder engagement to holistically assess risk management and affordability implications. Future changes to the GSE Pricing Framework should involve transparent processes that include a public comment period, targeted outreach meetings, and public forums with market participants and consumer advocate organizations.
“USMI and its member companies are dedicated to serving low down payment borrowers while simultaneously ensuring safety and soundness in the housing finance system,” added Appleton [5]. “The private MI industry is a natural partner for FHFA and the GSEs to promote policies, including through the pricing of single-family mortgage credit risk, that support affordable and sustainable homeownership opportunities for home-ready borrowers. As the FHFA and Director Thompson continue to exercise oversight of the GSE Pricing Framework, USMI and its member companies look forward to working with the agency to ensure that processes and policies advance access, affordability, and safety and soundness in the housing market.”