Fannie Mae-No Politics (FNMA)

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Mortgage Industry in for More Surprises;

The new fee from Fannie and Freddie on some mortgage

loans is unlikely to be the last change

7:03 am ET August 18, 2020 (Dow Jones) By Telis Demos



Fannie Mae 's and Freddie Mac 's new fee has roiled the mortgage industry. It could be just a taste of what is to come as the two giants' role in the housing market evolves.

The 0.5-percentage-point "adverse market" fee approved by their regulator and implemented by Fannie and Freddie last week will be applied to what the government-sponsored entities pay upfront to acquire many refinancing loans. Though limited—it won't apply to home purchases, for example—the fee still may hit some mortgage lenders, notably those that have locked in a rate on a loan to a borrower that won't actually be moved on to Fannie or Freddie until after the fee takes effect in September.

The fee also is likely to be passed through to borrowers, potentially putting pressure on volumes. Since the fee news last week, shares of newly listed Rocket Cos ., the largest U.S. originator, along with those of PennyMac Financial Services and Mr. Cooper Group , are down an average of around 5%.

Criticism of the fee has been swift and loud from lenders, affordable-housing advocates and even the White House. This might give investors a sense that originators, who have had booming business of late, have the upper hand in an environment in which helping people access cash and stay in their homes is politically important.

But even if critics were to win a reversal on this particular issue, there is much more of this type of conflict potentially to come.

Fannie and Freddie and their regulator are in the midst of efforts to raise capital in a quest to become free of government conservatorship. For any additional risk they bear they may need more equity capital as a cushion, which reduces their rates of return and appeal to investors. Potential investors will want to know how Fannie and Freddie can offload risk—or offset it with earnings, including fees.

It's harder for Fannie and Freddie to offload risk at the moment due to the slowing market for so-called credit-risk transfer securities. There was no issuance at all in the second quarter, according to data tracker Mark Fontanilla & Co.

So the answer might involve more fees. Fannie and Freddie don't have a lot of market incentive not to raise them: The pair are no longer locked in a battle for market share with private-label securitizers, as before the financial crisis. Today that market isn't what it once was, and it's still getting smaller: Bank of America estimates that the nonagency residential mortgage-backed security market will issue about $56 billion this year, down from $129 billion in 2019.

Fannie and Freddie cited market and economic uncertainty brought on by the pandemic. There's potentially more to that uncertainty than just credit risk, including that they have had to backstop mortgage servicers' payment obligations due to forbearance programs. This gives Fannie and Freddie all the more incentive to find new sources of income.

Even absent a pandemic, the transition from government conservatorship of Fannie and Freddie was never likely to be cost-free for the broader mortgage industry. Overlaying that process on top of the coronavirus crisis will likely turn up more surprises for investors.

Write to Telis Demos at [e-mail]