In December, mortgage-backing agencies Fannie Mae and Freddie Mac announced new regulations would take effect in March, raising the cost of some loans for low-income buyers. The regulations required Fannie and Freddie to pay higher fees on loans to borrowers with relatively low credit scores or those making minimal down payments. The higher costs would be passed on to borrowers, but implementation of the changes in fees has been delayed by the agencies’ new regulator.
Earlier this month, Levin L. Watt was sworn in as the new director of the Federal Housing Finance Agency (FHFA), which places him in charge of regulating Fannie Mae and Freddie Mac. Two days after taking on the role, Watt announced the delay. The new loan fee structure was set up by the former acting director, Edward J. DeMarco, and would have raised the base guarantee fee (known as the g-fee) by 0.1 percent along with other changes.
Watt said he felt the potential impact of the proposed fees should be studied more closely before going forward with the new fee structure. “I want to fully understand these implications before deciding whether to move forward with any adjustments to g-fee pricing,” he explained.
What the fees are for
The loan fees were designed to help pay for the insurance used to guarantee loans the agencies approve. Fannie and Freddie do not lend money to home buyers but approve and guarantee loans it purchases through government programs. By paying into the insurance fund, some lawmakers believed they could reduce the exposure of the loan risk to tax-payers. Currently, the two organizations write about six in 10 of all new loans and back about 80 percent of all home loans. That figure is down from a whopping high of 94 percent in 2009, a year after the agencies were bailed out by the government to the tune of $187.5 billion. This following massive foreclosures when the housing bubble collapsed. When the fees were announced, DeMarco said the reasoning behind the changes was to protect tax payers from future defaults.
Protection against the costs of mortgage default was only part of the motivation behind the changes. An additional goal was to create more equal footing between private lenders and Fannie and Freddie so that private lenders could become more competitive and take on a greater market share. This follows a directive of the Obama administration, which has also expressed interest in reducing the heavy role the two mortgage backers play in the housing market and the government exposure to the associated risks. However, because the loans will cost more to borrowers—and particularly low-income buyers—there are concerns the new fees could stall a slowly recovering housing market or place an undue burden on working people with moderate incomes.
An uncertain future
Many lawmakers on both sides of the aisle want to see Fannie Mae and Freddie Mac shut down entirely, while others prefer to see its role reduced. However, since the time of the bailout of Fannie and Freddie, the two have paid back a total of $185.3 billion in dividends, which is nearly all of the bailout money. This has made the threat of another round of defaults seem less dire to some law makers, who may no longer feel a strong sense of urgency to change the system. Other regulations requiring more stringent income verification and rules reducing loan limits have already been put in place as protections against reckless lending by Fannie and Freddie, so some may feel that the problems have been contained.
In a statement, Watt said, “The implications for mortgage credit availability and how these changes might interact with the new qualified mortgage standards could be significant.” He stated that the implications needed to be evaluated but did not suggest a time frame for when the new structure will be implemented or revamped.
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