Mortgage Reel: Treasury eyes plan for smaller-scale Fannie, Freddie Floats menu of reform options, calls for hikes in guarantee fees
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Treasury eyes plan for smaller-scale Fannie, Freddie Floats menu of reform options, calls for hikes in guarantee fees
By Ronald D. Orol, MarketWatch
Last Update: 11:47 AM ET 2/11/11
WASHINGTON (MarketWatch) — A large portion of Fannie Mae and Freddie Mac should be wound down over time and the fees that the troubled mortgage refinance giants charge for guaranteeing home loans sold to investors should be increased to ease the private sector back into the housing market, the Treasury Department said Friday.
In a long-awaited report on the future of the two companies — key cogs in the nation’s housing-finance system — the Treasury included both short-term moves as well as three longer-term reform options, which would require enactment of legislation passed by Congress.
Treasury Secretary Timothy Geithner told reporters that the reform plan would spell modestly higher mortgage costs for average homeowners over the long term. There’s general agreement on Capitol Hill about the need to reduce the portfolio size for Fannie
(FNMA) and Freddie (FMCC) , Geithner said, but he didn’t comment on which of the three long-term options he might prefer.
“We think there’s very broad consensus, both on the Hill and in the broader housing, financial community about the need for a transition to a role with a much smaller role for the government,” Geithner said. See the full Treasury Department report, “Reforming America’s Housing Finance Market”
Politically, having a menu of different options gives the Obama administration some negotiating latitude as well as greater ability to engage in a behind-the-scenes dialog with congressional Republicans over the future of the nation’s still-fragile housing-finance system.
One long-term approach, backed by some GOP lawmakers, would create a virtually privatized system significantly reducing the government’s role in the mortgage market by only allowing the Federal Housing Administration to guarantee a small group of mortgages for low- and moderate-income borrowers who meet creditworthiness criteria.
The second long-term approach is more controversial: create a similar targeted guarantee program but also set up a catastrophic-risk insurance fund that would seek to make sure lenders have access to credit in the event of massive liquidity crises.
The third would set up a similar guarantee approach, but the government would also offer reinsurance for securities of a targeted range of mortgages.
These long-term solutions would require major legislative changes — something that is likely to take years to realize — as lawmakers contemplate their impact on a housing market that, in the short run, is expected to yield another record year of foreclosures.
Changed landscape
Fannie and Freddie have long been crucial to the housing market, guaranteeing or owning roughly 50% of the residential mortgage market. Including Federal Housing Administration loans, the government has been responsible for about 95% of mortgage origination between 2008 and 2010, according to a Bank of America analysis.
For the short term, the Treasury’s seeking to have Fannie and Freddie increase to private-market levels the price they charge for guaranteeing mortgage securities they sell to investors.
As part of this approach, the Treasury is recommending that the Federal Housing Administration hike the fee that borrowers must pay for insurance for FHA-backed mortgages.
The agency estimates that for an average FHA mortgage, that higher fee would translate to an increase of roughly $30 a month in borrower costs. An announcement of the feehike’s expected on Monday; it’s anticipated to take effect on April 18.
The goal of these approaches, in the short term, would be to help “level the playing field” and drive investors to once again buy private-label residential mortgage-backed securities, the Treasury said.
The Treasury also recommended that Congress not pass new legislation continuing a provision that allows Fannie and Freddie to buy mortgages with values as high as $729,750, the level to which it was raised in 2008. Without action by Congress, the limit on loans that Fannie and Freddie can buy will drop back to a maximum of $625,500 effective in September.
Republicans support returning to the lower limit, which would make it more expensive for some higher-end borrowers to obtain access to credit at the same time as it limits potential costs to taxpayers.
The Treasury’s report also recommends a gradual increase in down payments required for Fannie and Freddie to guarantee a mortgage to as high as 10% over time — another move that Republicans, in concept, support.
Bone of contention
But in a move that’s not likely to sit well with many Republicans, the Treasury also has proposed continuing its ongoing plan to have Fannie and Freddie wind down their portfolio of mortgages by at least 10% a year. A Republican bill expected to be introduced shortly contemplates a much quicker winding down of the portfolio — to the tune of billions more a year to $250 billion within three years of the passage of the legislation.
With the Treasury’s approach, it would take roughly 10 years to wind down the portfolios to $250 billion. At the end of 2010, Fannie’s retained portfolio was $789 billion and Freddie’s was $697 billion, according to the federal overseer for the two government- sponsored enterprises. See related MarketWatch First Take on potential unintended consequence of Treasury plan.
The two mortgage giants were originally set up by Congress to expand home-ownership by having Fannie and Freddie buy up mortgages from banks and other direct lenders so they would have the capital to lend more. They package them into bonds and mortgage- backed securities, some of which they keep in their portfolio and others that they sell to investors.
Fannie and Freddie charge investors a “guarantee fee” in return for backing the mortgage bonds they sell. However, the two companies became saddled with toxic mortgages and were nationalized at the peak of the financial crisis in 2008 to avoid losses and stem the credit contagion.
As of October, Fannie and Freddie have cost taxpayers roughly $151 billion in taxpayer funds, used to cover their losses, with more losses expected on the horizon.
Both Republicans and Democrats have been hesitant to move forward with legislation to reform the housing companies because of the impact any changes — or even the announcement of changes — could have on the housing market and with it, the economic recovery.
Republicans have their own ideas
A top Republican in the House, Rep. Scott Garrett said he’s encouraged that the Obama administration laid out a number of options similar to his own on how to reform the housing-finance system.
“While there are obviously going to be some differences … I look forward to working with [Geithner] and [Obama] to find a solution we are all amenable to,” he said. Garrett (R., N.J.) heads a key subcommittee responsible for reforming Fannie and Freddie.
With the GOP back in control of the House of Representatives, lawmakers have begun to hold hearings on the subject but have yet to introduce legislation. Republicans have expressed support for some recommendations in the Treasury’s report, but not others.
For example, regarding the $729,750 cap, no Democratic effort to reinstate the higher purchase limit would pass because Republicans in the House are not going to support such an extension, said Jaret Seiberg, analyst at MF Global Inc.
Echoing Geithner, Bank of America analyst Ralph Axel contends that mortgage rates are likely to increase — particularly for larger mortgages — if guarantee fees are hiked and the size of loans that Fannie and Freddie can buy drop to lower levels. These so-called high credit borrowers “will experience continued access to financing and get the jumbo mortgages at the higher rate, but there will be a segment of population that is borderline and once the loan limits decline, there will be some people unable to get financing,” he said.
Rep. Jeb Hensarling (R., Texas) and other Republicans want to take further steps limiting what mortgages Fannie and Freddie can buy.
Hensarling’s expected shortly to introduce a bill, “The GSE Bailout Elimination and Taxpayer Protection Act.”
It would wind down most of both Fannie and Freddie over three years. It includes a provision that would, during the winding-down transition period, only allow Fannie and Freddie to make mortgages purchases that are at or below their local area median home price.
Hensarling’s bill, which went nowhere when the Democrats ran the House last year, would also require minimum down payments of 5% for all new loans purchased or guaranteed by Fannie and Freddie in the first year after enactment. That would go up to 7.5% in the second year and 10% in the third year in an approach similar to what Treasury is recommending.
Some top Republicans back the Treasury’s recommendation that Fannie and Freddie raise the fees it charges for guaranteeing credit risk. The Obama administration contends that such a hike would make it more expensive to buy government-backed mortgage securities and, as a result, drive investors to buy private-label residential mortgage- backed securities.
Rep. Randy Neugebauer (R., Texas), the new chairman of the oversight and investigations subcommittee of the House Financial Services Committee, said he supports a hike in guarantee fees to kick start the private market.
But on another front, Republicans are generally opposed to the Treasury’s recommendation that Congress consider creating a catastrophic-risk insurance fund. Garrett indicated his oppositon, arguing that the government’s track record in pricing risk with insurance funds has been “extremely poor.
“The Deposit Insurance Fund, the National Flood Insurance Program, and the Pension Benefit Guaranty Corp. are three government insurance programs that historically have terrible records of properly pricing for risk,” Garrett said.