Skip to main content

Marketwatch: Treasury eyes Fannie, Freddie fees hikes

February 10, 2011

by Ron Orol

The White House may move ahead without congressional approval on proposals to reform the government-controlled housing giants Fannie Mae and Freddie Mac, including raising the fees charged for guaranteeing credit risk.

According to people familiar with a long-expected report due out as early as Friday from the Treasury Department, the administration contends that a hike in fees charged by Fannie and Freddie would make it more expensive to buy government-backed mortgage securities and, as a result, drive investors to once again buy private-label residential mortgage-backed securities.

In addition to this immediate approach to slowly easing the private sector back into the housing market, the report will also include a series of long-term reform proposals that do require legislation to revive the sector.

Obama administration officials appear reluctant to come up with a single proposal on how to replace Fannie and Freddie, and the series of proposals are expected to include at least three options all of which include a reduction over time of the role of government in the housing sector, people familiar with the matter said.

Fannie Mae and Freddie Mac purchase whole mortgages from banks and other direct lenders and package them into bonds and mortgage-backed securities. They charge investors a "guarantee fee" in return for backing the bonds they sell.

According to people familiar with the report, the Treasury is considering a handful of ideas.

One idea under consideration at the Treasury is to have Fannie and Freddie's regulators, the Federal Housing Finance Agency, increase the guarantee fee for mortgage securities Fannie and Freddie sell to investors that include mortgages of a value between $625,500 and $729,750, at least until Sept. 30, according to a person familiar with the report.

On Sept. 30 the size of loans Fannie and Freddie can buy will drop back to a maximum of $625,500. In 2008 Congress voted to temporarily raise the limit to as high as $729,750.

That temporary period of targeted higher fees could help identify whether the private housing market can begin to replace Fannie and Freddie, which currently own or guarantee 95% of new mortgages.

The Treasury Department is expected to release a series of measures using existing authority to transition the market towards the private sector. Treasury spokesman Steve Adamske did not return requests for comment.

Jaret Seiberg, analyst at MF Global Inc. in Washington, argues that one way to open the door for private-label residential mortgage-backed securities is to make the cost of Fannie and Freddie-backed mortgage-backed securities more expensive.

"It appears the administration is exploring the idea of forcing Fannie and Freddie to raise their guarantee fees to make private-label RMBS a more viable option," he said.

The approach is something top Republicans are backing to an extent as well, including Rep. Randy Neugebauer, the new chairman of the oversight and investigations subcommittee of the House Financial Services Committee.

In a speech before a University of Maryland and New York University event in January, Neugebauer said increased fees levied by Fannie Mae and Freddie Mac would bring "parity" to housing finance.

"With higher guarantee fees, people will start looking for return in the private market. They will give some basis points to get a bit more return and give up the federal backing," Neugebauer said. "We have to make sure Fannie and Freddie are not competing with private market."

Future of the 30-year fixed rate mortgage
The expected report comes as a top Republican held a hearing Wednesday afternoon about the future of the U.S. housing sector. Rep. Scott Garrett (D., N.J.), chairman of the House Financial Services capital markets subcommittee, held a hearing on how to reform the housing giants, which were nationalized at the peak of the crisis in 2008 to avoid losses and stem the credit contagion.

Many Republicans want to fully privatize the two housing giants altogether, while numerous Democrats want a permanent government agency to buy and sell mortgages and mortgage securities.

Lawmakers and participants in the hearing clashed over whether 30-year fixed rate mortgages could still exist without government guarantees that Fannie and Freddie provide.

Garrett argued that the private sector can provide a 30-year fixed rate mortgage product without a government assistance.

"The first assertion offered is: ‘The 30-year fixed rate mortgage product cannot survive without a government guarantee,' Garrett said Monday at a securitization forum. "Given the fact that there was a fairly robust 30-year jumbo market before the crash and that you can get a 30-year fixed jumbo today, I don't believe that assertion is correct."

Rep. Maxine Waters, (D., Calif.) expressed concern about whether there would be an affordable 30-year fixed rate mortgage without government involvement.

Alex Pollock, fellow, American Enterprise Institute, said it would be somewhat more expensive but it would "beyond a doubt" be available.

However, Sarah Wartell, Executive Vice President at the Center for American Progress, said she agreed it would be available but difficult to attain and with a more expensive 30-year fixed rate mortgage, many people would be driven to more problematic adjustable rate mortgages.

"I agree it would be available, but I disagree that it would be competitive and attract middle income houses," Wartell said. "The reality is that we are adding economic volatility by moving people to adjustable rate mortgages."

Catastrophic risk fund
The Treasury will also propose long-term fixes to the Fannie and Freddie problem. People close to the Treasury Department also expect the White House to propose as an option the creation of a catastrophic insurance fund matched with an explicit government guarantee paid for in advance to protect against loss, with the private sector in the first loss position.

With one option, banks or other institutions issuing mortgage securities would pay a guarantee fee that would go into a catastrophic insurance fund as the first line of defense against losses in the event of a crisis. This measure, which doesn't appear to have the support of GOP lawmakers, would require legislation to be approved.

Federal Reserve Chairman Ben Bernanke told a House Budget Committee Wednesday that if the government is involved in providing credit guarantees for mortgages it should do so as "a deep backstop." He added that first losses should be born by private securitizers or originators of the mortgages.

"The government, if it does provide backstop insurance, should do so for an actuarially fair fee, premium," Bernanke said. "And that would be -- essentially allow the government to provide a backstop in situations like we had the last few years, where the housing market comes under enormous stress."

On Monday Garrett indicated skepticism with a catastrophic credit risk fund.

"The next assertion is: ‘The government can easily price the tail or catastrophic credit risk associated with the mortgage market,'" he said. "The government's history in pricing risk is extremely poor. The Deposit Insurance Fund, the National Flood Insurance Program, and the Pension Benefit Guaranty Corporation are three government insurance programs that historically have terrible records of properly pricing for risk."

MF Global's Seiberg said he believed the congressional approval made this approach less likely to succeed.

"The odds are against this option as we have trouble seeing GOP leadership going along with it," he said. Read about different options the White House is considering.

Fannie Mae and Freddie Mac were nationalized at the peak of the crisis in 2008 to avoid losses and stem the credit contagion. As of October, Fannie and Freddie have cost taxpayers roughly $151 billion in taxpayer funds, used to cover their losses, with more losses expected on the horizon.

Issues:Housing