GSE Fee Changes Too Small to Notice?

Changes to Fannie Mae and Freddie Mac's fee structure were announced by the Federal Housing Finance Agency (FHFA) on Friday.  But in the words of The Wall Street Journal, "the changes are so small that few borrowers will notice."

Modifications to the Loan Level Price Adjustments (LLPA) will result mainly in slightly lower fees to borrowers with weaker credit.  FHFA said it was directing the government sponsored enterprises (GSEs) to eliminate the 25 basis point adverse market fee they implemented in March 2008 and replace if "with targeted increases in guarantee fees to address various risk-based and access-to-credit considerations."

Those "targeted increases" will be a 25 basis point increases in fees for borrowers with credit scores above 700 and loan-to-value (LTV) ratios under 80 percent. Thus those borrowers will see zero net change in fees. The 25 basis point increase will also apply to mortgages over $417,000 and a 37.5 basis point increase will apply to some higher-risk loans.  Borrowers with credit scores below 700 or LTV ratios over 80 percent will not be charged these higher fees, resulting in a net reduction in their borrowing costs of 25 basis points.

Here is a simplified chart of the changes accounting for the removal of the Adverse Market Delivery Charge (AMDC).

FHFA said, "Overall, the set of modest changes to guarantee fees are roughly revenue neutral for the Enterprises and will result in either little or no change for most borrowers."   

In conjunction with the fee changes FHFA announced its decision to strengthen financial and operational eligibility standards for mortgage insurance companies.  According to a fact sheet from Fannie Mae, the revised standards include financial requirements that seek to ensure that private mortgage insurers can meet their obligations in time of economic stress.  The insurers have several avenues though which to do this including raising capital, entering into reinsurance contracts, and replacing illiquid assets with liquid ones.  The new standards also include requirements to govern the relationship between the GSEs and the insurers such as uniform claim processing timelines and quality control requirements.

In releasing the new fee structure FHFA said it has determined that current fees, on average, are at an appropriate level and that some modest adjustments to upfront guarantee fees are also appropriate.  FHFA Director Melvin L. Watt said the new fees represent "the culmination of months of review and analysis and reflects input received from a wide range of stakeholders."

According to Bloomberg, the announced fee changes means that FHFA has dropped plans to increase fees for borrowers in areas, such as New York and New Jersey, where legal requirements have resulting in long and costly foreclosure timelines.