Government Plans To Raise Mortgage Rates In 5 States Via New G-Fees
For the third time in 12 months, the Federal Home Finance Agency (FHFA) may raise its mortgage guarantee fees.
In a notice sent to the Federal Register, the FHFA says it wants to raise its guarantee fees by as much as 30 basis points -- a change that would add as much as 1.5 discount points to every new conforming mortgage, or roughly 0.625%.
The FHFA And Risk-Based Pricing
The Federal Home Finance Agency was formed last decade as part of the Housing and Economic Recovery Act of 2008. Later that year, it took Fannie Mae and Freddie Mac into conservatorship, nationalizing the two former quasi-independent, government-sponsored entities.
Among the FHFA's main roles is a statutory obligation to "preserve and conserve" the assets of Fannie Mae and Freddie Mac. One way in which the FHFA satisfies this role is via loan-level pricing adjustments (LLPA).
First introduced in 2008, LLPAs are extra loan fees charged to applicants whose mortgages are "more risky". For example, an applicant whose FICO score is 660 represents a bigger lending risk than an applicant whose score is 740. Via the loan-level pricing adjustment program, the applicant with lower credit score will pay a higher mortgage rate.
Other loan traits that invoke the LLPA system include purchasing or refinancing a multi-unit home (e.g. 2-unit, 3-unit, 4-unit); purchasing or refinancing an investment property; and, purchasing or refinancing a home for which the combined loan-to-value exceeds certain LTV thresholds.
In telling banks to assign specific mortgage costs to specific mortgage risks for specific applicants, loan-level pricing adjustments have been effective retail origination policy. It's no surprise, therefore, that the FHFA aims to extend this same risk-based price model to secondary markets.
Guarantee Fees : Rising In "Foreclosure High-Cost" States
Guarantee fees are an esoteric element in the business mortgage. Or, at least, they used to be. In this past 9 months, they've moved into the (semi-)mainstream consciousness after the FHFA twice hiked the fees required to securitize a mortgage.
The result has been higher mortgage rates for everyone.
As a recap, guarantee fees are fees paid by mortgage wholesalers to mortgage securitizers -- for example, from your local Big Bank to Fannie Mae or to Freddie Mac -- in exchange for handling the pooling, servicing, and selling of mortgage-backed bonds.
"G-fees" help pay for other services, too, the most well-known of which is credit default protection. G-fees are like insurance, in this respect, protecting the FHFA against credit-related losses in its portfolio -- except when losses exceed projections.
And this is why the FHFA wants to raise its g-fees again.
In looking at all 50 states, the Fannie Mae and Freddie Mac conservator has determined that the cost of default varies by state, based on its local law. In some states, the foreclosure process is simple. In others, it's arduous. It's in these latter states that the costs to manage a default, foreclose on the home, then obtain marketable title exceed for what the FHFA is "insured" via g-fees.
To align default costs with their true cost to insure, the government announced its intent to raise g-fees in the following five states :
- New York : G-fees expected to rise by 30 basis points
- Florida : G-fees expected to rise by 20 basis points
- Connecticut : G-fees expected to rise by 20 basis points
- New Jersey : G-fees expected to rise by 20 basis points
- Illinois : G-fees expected to rise by 15 basis points
These states are "statistical outliers" in terms of total default-related costs as compared to the rest of the United States. The FHFA, therefore, wants to see pricing better aligned with risk -- just like it did with loan-level pricing adjustments.
Should one of these 5 states then reform its laws and standards to shorten foreclosure timelines and move costs more in line with national averages, the FHFA would remove its state-specific guarantee fee.
For each 10 basis point g-fee increase, retail mortgage rates in New York, Florida, Connecticut, New Jersey, and Illinois would rise between 0.125-0.250 percent.
Plan For Higher G-Fees, Mortgage Rates In 2013
Higher g-fees are coming. The Federal Housing Finance Agency last raised g-fees in August 2012, and it plans to raise them again to preserve and conserve the assets of Fannie Mae and Freddie Mac. Unfortunately for today's home buyers and mortgage rate shoppers, with each g-fee increase, mortgage rates rise.
Changes to g-fees and other loan costs are unpredictable, which is why trying to "time the mortgage market" can be foolish. Mortgage rates may drop, but new costs often cancel those gains out. If you're shopping for a mortgage, therefore, or wondering whether it's the right time to refinance, the answer is often "yes".
You can always refinance again should mortgage rates drop more.