FHFA is the Federal Housing Finance Agency. They regulate Fannie Mae and Freddie Mac. FHFA just announced another round of Fannie Mae and Freddie Mac guaranty fee increases. These are the fees that Fannie and Freddie charge lenders to guarantee loans, and of course Fannie and Freddie have the backing of the U.S. government. Without this federal backing, Fannie and Freddie would not exist, or they certainly would not exist in the size and scope they have over decades and decades. The FHFA fee increase to the lenders will average 10 basis points. Of course, this will be passed onto the consumer. To put this into perspective, 10 basis points is roughly equivalent to 1/8% in interest rate, not much. But it is an increase nonetheless, and it is a virtual certainty that these fees will increase quite a bit over the next few years.
So the bigger news is that mortgage rates will increase, especially since Fannie Mae and Freddie Mac are broke, due to continued increases in the guaranty fee. So while people expect rates to stay low because of misleading articles by the media and promises by Ben Bernanke that he cannot keep, mortgage rates look set to go up due to these continued guaranty fee increases! Over the last several years there have been numerous guarantee fee increases, and these are not talked about much in the media. There was an article recently in Forbes magazine that said without these guarantee fees that interest rates would be almost 1% lower! So for those of you that think interest rates are going to plummet more, the government has other plans via these guaranty fee increases. So government has been raising, and will continue to raise due to losses at Fannie Mae and Freddie Mac, the cost of interest rates.
Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.
G-fee hikes are good things if they force banks to go to private-sector alternatives, rather than Fannie and Freddie to buy their loans. Anthony Randazzo of Reason Foundation has championed g-fee hikes for this reason.
The question is are regulatory barriers blocking Fannie and Freddie’s competitors who could offer a lower fee for mortgage insurance and securitization.
Hello John, thanks for the feedback. Anyone that knows me well knows that I am very libertarian and free-market in how I approach everything. I agree with you in principle, but in the real world having the private sector take over the mortgage market would likely be problematic. Here is why:
1. You mentioned that the G-fee hikes are a good thing if they force banks to go the private sector alternatives rather than Fannie Mae and Freddie Mac who are controlled by the government. The operative word is “if“. What if the G-fee hikes do not force banks to find other alternatives? Then all that was done was prices were raised to the consumer to feed the ever hungry government.
2. I do not know that there are regulatory barriers blocking Fannie Mae and Freddie Mac’s competitors who would otherwise come to market. I simply think the market is so distorted that the private sector is absolutely fear filled and uncertain about bringing a mortgage product to market and realizing enough profit from it, when one product exists that everyone uses and is so heavily subsidized by government.
3. Even if the G-fee hikes somehow force banks to find private sector alternatives, the repercussions could be drastic, and could seriously harm the economy.
Any clear thinking human knows that history has shown repeatedly that private individuals do things better working under a profit motive than big government does by mandate. I specify “big government” because I want to make it clear that I am no anarchist, and have no hatred of government in general. I only deplore large-scale, centrally planned, out-of-control “big” government.
Since the mortgage and real estate industries have been suckling at the government teet for so long, how do you kick the habit? It’s the same question that applies to health care, education, and everything else that big government ruins.
The markets (in this case real estate and the mortgage markets) are so far distorted by what government has done over the last 6-7 decades, that if you try and fix it by bringing in private sector discipline, it may collapse the entire economy. Mortgage rates would (and should) go up, down payment requirements would (and should) drastically increase, and real estate values would drop due to the increased skin in the game that private sector lenders would want. In a country where we have been used to low down payments, fixed rate mortgages, 30 year terms, mortgage interest deductions, and subsidized interest rates; how would real estate values be affected by a minimum down payment requirement of 20% to 50% down, adjustable rate mortgages with no or few fixed rate options, higher interest rates, etc. It would be a major, painful adjustment.
And I know we need government out of markets, but….I guess the question is how do we phase in the needed changes? Over what time period? Does anyone get a break and get treated differently? Is it fair to people who bought real estate at a certain price to then the value drop because of all the changes privatization brings?
My guess is that the marketplace will force government to address all of our problems either proactively by changing budgets, priorities, and legislation, or it will happen via some sort of eventual economic crash and the market will force change on us. No one, not even big government, can continue to prop up forever a market in a manner that it should not exist.
You could ask the same question of Social Security. People that have paid in a small amount over the term of their work life from, let’s say, the 1950’s through the 1980’s, may get a good return on their money as they take Social Security from 1990 through the end of their life, and that clearly creates a system that cannot work. Then there are those of us that are younger, that will probably pay in a much larger sum over our working career, and will take out a small fraction of what we paid in. Social Security is not fair to those people. I would personally rather have every dollar that I have paid into Social Security, retained by myself, invested by myself, and I would have a much more comfortable retirement instead of relying on Social Security to any degree.
So this question can be applied to any sector of society that big government has stuck their nose way too far into. How do you unwind such a distorted mess that the government has caused? How do you make it fair to the people that have gone before us? And how do you make it fair for the people ahead of us? How do you minimize the pain? Have you set it up so that this never happens again, and markets never get distorted by a big government that wants to play favorites, call the shots, and allocate capital; where it has no business doing so?
Your point is well taken and I’d rather rely on the private sector for most everything, I just don’t know what the real-world answers are to get to the solution without doing serious damage to the larger economy. This is beyond graduate-level work, and will probably be something for millions and millions of people in each marketplace to sort out for themselves going forward, as needed solutions are brought to us, or forced on us.