Replies to post #413676 on Fannie Mae-No Politics (FNMA)

[Cubshawk]

Ignorance displayed as arrogance.

If you were paying attention you'd realize we were talking about the government guaranteeing the mortgage market as a whole - not individual loans. The fee on each policy is just a mechanism to fund the overall backstop by the federal government - not pay for individual loan guarantees.

contrarian bull
Instead of FnF covering the cost - why not just have a small fee on each individual mortgage based on loan value at time of origination?

Have you ever heard of companies called Fannie and Freddie?

But in case you never heard of them... This is precisely what F&F do. When you take out a mortgage that they back - you are charged a one-time "up front mortgage insurance premium (UFMIP) which is set as a percentage of the mortgage amount. This goes to F&F as an initial premium to back the loan. Then monthly you pay a premium that varies depending on factors like LTV. Those two fees are a primary source of income for F&F and thus "back" the risk they take on for the mortgage possibly defaulting. Once you have enough equity in the loan you can file to have that monthly premium removed from your loan payments. (Lots of people forget to do this and that is additional profit for F&F)

Since 2008 those fees have been increased quite a bit - approximately twice what they used to be. When loan losses drop back to historic levels this would indicate F&F profits should be 2 to 10 times what they were before 2007.

That is - assuming they are allowed to keep that lucrative business and keep premiums where they are. If their profits are too high - and the feds quit stealing them - there will be a call to reduce those premiums.

[contrarian bull]

Hmm.. reading backwards I misunderstood the question. It was about a fee for underwriting F&F, not underwriting those mortgages...

But - isn't there already such a fee? Or was that one of the proposed "fixes"?

[HappyAlways]

If we need to move forward, we need to know why they (mainly the senators) still want to replace Fannie & Freddie. IMO, FnF model is well proven and extremely cost efficient. They were unnecessarily placed under C-ship to buy time to bailout the TBTF banks. George Bush said it was a temporary measure to calm some nerves. Paulson said it was a time-out. The main root cause was FnF were forced to take on a fixed % of low-income family housing loans (i.e. the sub-prime loans). That gave the TBTF banks to dump bad mortgages to them.

Anyone has any idea ?

[Zaadx]

Implicit Guarantee now turning to Explicit Guarantee?:

https://www.wsj.com/articles/fannie-and-freddie-endgame-takes-shape-1495618202?mod=djemheard_t

[Donotunderstand]

contrarian

the concept of insurance - is pooling the risk

so a small fee is put on each mortgage - unless you pool those fees and risks and put a MISTAKE of undercharging on some one company there is no safety for the lenders

oops
I just described F and F

With Sallie Mae - towards the end before BO killed it - they collected such fee but took none of the risk - zero - and indeed were not needed

However F and F - collects the fees - pools the income and the risk and pays all the losses - etc.

The GOV which would have to reinsure at some level - post original private sector loss - can deal with one entity and not 10,000

Note - in theory - the interest rate being charged covers the cost of the risk of failure to pay

F and F then charge an insurance charge above that - in essence insuring against a mistake in the calculation of the interest rate

That approach has problems where the interest rate is not high enough for the risk (some of the lower quality loans). That is why the current process includes a lot more disclosure of a lot more data by the banks selling mortgages to F and F ..... and why there is a 20% down requirement - and why some put back of initial risk onto the lender is wise