jtimothyhoward - JUNE 4, 2020 AT 9:17 PM
Two reactions, first policy then financial.
The current FHFA leadership will not be able to
“wash its hands” of the consequences of its capital rule.
It is aggressively anti-homeowner, and will have
the effect of taking money out of the pockets of
a segment of the U.S. population that was struggling
before and now is bearing the brunt of the economic
costs of the pandemic, and effectively funneling that
money to the big banks.
That policy is on Director Calabria and his team,
as it should be. And it’s not driven by economics
or “safety and soundness,” but by ideology, which
I hope some future leadership at FHFA has the
vision, courage and compassion to abandon and change.
In the meantime, it will be up to the investment
community to decide whether to play on Director
Calabria’s field.
Many of these investors will understand that
“raising guaranty fees 25bps (or more)” is
not a given. We’ve already seen a substantial
market reaction to the fee raises that have
occurred since before the financial crisis.
One obvious change is that in 2007, 37 percent
of Fannie’s credit guarantees were on loans with
credit scores under 700; in 2019 only 14 percent
were. The reason, almost certainly, was pricing.
Grids published by FHFA in 2014 showed that the
target guaranty fee for loans between 61 and
80 LTV and a credit score less than 700 was
129 basis points; for the same credit scores
and an LTV from 81 to 100 the target fee,
even after private mortgage insurance,
was 142 basis points.
Fannie and Freddie didn’t charge those fees in
2014–they “only” charged 80 basis points for
loans in those LTV and credit score ranges–
but in the proposed rule they would have to,
because FHFA’s “minimum risk weight” of 15
percent on high-quality loans takes away much
of Fannie and Freddie’s ability to cross-subsidize.
But the point is that even before any future round
of fee increases, most of Fannie and Freddie’s
high-risk business already has been
priced out by past fee hikes. Another interesting
historical fact (that I doubt the current team
at FHFA is aware of) is that under Ed Demarco,
Fannie and Freddie were told to raise fees to
“encourage more private sector participation”
and “reduce their market share” (sound familiar?).
They did that fairly steadily through 2014,
when, for Fannie, a 53 basis point net fee on
new business caused its total volume of
single-family credit guarantees outstanding
to fall from the previous year
(and again slightly further in 2015).
Fees on new business haven’t been close to that
level since (they averaged 47 basis points last year).
The 2014 fee experience strongly suggests that there
IS a limit to how high fees can go before the volume
effect offsets the fee effect, and it may not be
that far from where we are now.
Potential new investors, I’m confident,
will be very interested in understanding
this pricing dynamic before they agree to
put $150 billion, or more, of new money
into two companies whose regulator seems
determined to make them fight to keep
their heads above water.
