By Joe Light
The regulator of Fannie Mae and Freddie Mac will direct the
housing-finance firms to slightly cut mortgage fees for riskier
borrowers, a decision that falls short of what housing advocates
wanted and yet is likely to anger conservative politicians who
wanted higher charges.
For most people taking out a loan, the change will be
negligible. Some riskier borrowers, who make lower down payments
and have lower credit scores, will see slight savings that could
translate to hundredths of a percentage point on a mortgage
rate--an amount that would have little effect on the housing
market--according to people familiar with the Federal Housing
Finance Agency's plan.
To cover the cost of the reductions, Fannie and Freddie will
raise fees on some other borrowers, such as those borrowing for an
investment property and some of those who have safer borrowing
characteristics, with the intent of the changes to be
revenue-neutral for Fannie and Freddie, the people said.
The fee changes will put an end to more than a year of
speculation as to what the FHFA would do under Melvin Watt, a
former Democratic congressman from North Carolina who was sworn in
as director in January 2014 and some advocates had hoped would
prove more amenable to lessening borrowing costs than his
predecessor.
As one of this first moves after taking office, Mr. Watt halted
a planned fee increase by the former acting director, Edward
DeMarco, a move that Mr. DeMarco had said was necessary to
encourage private investors, who require a higher rate of return,
to compete for business. That increase would have been the latest
in a string of fee increases over the past several years.
After Mr. Watt halted the increase, some had speculated that he
could move significantly in the other direction, sharply reducing
fees for riskier borrowers in an effort to broaden credit access.
However, the FHFA's ultimate direction, in which costs will remain
little changed, signals that Mr. Watt has chosen a middle
route.
"What we've seen so far from Director Watt is he is an
incrementalist," said Julia Gordon, senior director of housing and
consumer finance at the left-leaning Center for American Progress,
who has pushed for Fannie and Freddie to step back from charging
higher prices to riskier borrowers. "It's important that this not
be the last word" on fees, she said.
Nevertheless, the changes that are being made--which include the
termination of a borrowing surcharge imposed by Fannie and Freddie
during the crisis--are likely to draw the ire of some conservatives
on Capitol Hill, who believe that the government is generally
encouraging riskier lending practices.
But ultimately for most borrowers and the economy, the changes
will have little impact except on the margins, said Mark Zandi,
chief economist at Moody's Analytics. "It sounds like they're
maintaining the status quo, roughly speaking, and that feels right
to me. It's exactly what they should be doing," said Mr. Zandi.
Fannie and Freddie don't make mortgages. They buy them from
lenders, wrap them into securities and provide guarantees to make
investors whole if the loans default. In exchange for those
guarantees, Fannie and Freddie charge lenders fees that are
typically passed through to borrowers as a component of mortgage
rates.
The government put Fannie and Freddie in a so-called
conservatorship in 2008 after the companies suffered significant
crisis-era losses. The companies ended up receiving $187.5 billion
in aid from the U.S. Treasury, but then became highly profitable,
sending the U.S. Treasury more than $228 billion in dividends.
"This decision is a step in the wrong direction, and it
increases the liability of American taxpayers who are already on
the hook for countless billions of dollars in guaranteed loans,"
said Rep. Scott Garrett (R., N.J.). "It's just another example of
the worst kind of cronyism that punishes qualified borrowers while
promoting many of the same policies that played a major role in our
most recent financial crisis."
In the past year, some conservatives have criticized Mr. Watt's
decision to allow Fannie and Freddie to back loans made to
borrowers with down payments of as little as 3%, down from the
previous 5% minimum.
Separately, the Federal Housing Administration--which insures
loans to borrowers who make down payments of as little as 3.5%--in
January said it would cut fees by 0.5 percentage point for most
borrowers.
The FHFA's latest decision to lower fees for some borrowers is
"just starting to look like part of a larger trend, that's my real
concern. What's next?" said Mark Calabria, director of financial
regulation studies at the libertarian Cato Institute. "There was
not some single moment or event that got us into the last mess, but
the accumulation of lots of errors."
In making the decision not to significantly change fees, the
FHFA likely weighed the potential risks of Fannie and Freddie
needing a taxpayer bailout if their revenues were reduced
significantly, said Isaac Boltansky, an analyst with Compass Point
Research & Trading LLC in Washington.
"The potential for a draw, even though it would largely be
symbolic, had to weigh on the FHFA when they were making their
pricing decision," Mr. Boltansky said.
Write to Joe Light at joe.light@wsj.com
Access Investor Kit for Federal Home Loan Mortgage Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US3134003017
Access Investor Kit for Federal National Mortgage
Association
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US3135861090