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24 FHFA: AVERAGE G-FEES ARE TWO–AND-A-HALF TIMES THEIR 2009 LEVEL Under the Housing and Economic Recovery Act of 2008 (HERA) requirements, the Federal Housing Finance Agency (FHFA) is obligated to submit an annual report to Congress concern- ing Fannie Mae's and Freddie Mac's guarantee fees. e report titled, "Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2014" is an analysis of the GSEs' fees by product type, risk class, and the volume of a lender's business. e report also reviews the costs of providing the guarantee in comparison to the prior year. According to the FHFA report, the average level of guarantee fees charged has increased since 2009, when the report began. e guarantee fees are now two-and-a-half times their previous level from 2009 to 2014. e average fees increased from 22 basis points to 58 basis points from 2009 to 2014. From 2013 to 2014, average fees increased from 51 basis points to 58 basis points. e report also noted gaps on 30-year fixed rate loans were more negative and gaps on 15-year loans were more positive in 2014 than in 2013. is is mostly because of changes in the models the enterprises use to estimate the capital necessary to support their mortgage guarantee business. e gap on 30-year fixed rate loans was negative in relation to targeted return on capital; the returns on capital were positive. e percentage of loans the enterprises pur- chased from small lenders increased significantly in 2014, while pricing differences between small sellers and large sellers remained small, the report said. Fannie Mae and Freddie Mac acquire single- family loans from lenders and securitize them in the form of mortgage-backed securities (MBS). Even though the GSEs have some MBS on their balance sheets, most are held by private inves- tors. e GSEs guarantee an on-time payment of principal and interest for investor-held MBS. In exchange for providing this guarantee, the GSEs charge lenders guarantee fees. "Although the Enterprises are always the ultimate guarantors, they may choose to retain the credit risk on their own balance sheets or, as part of their credit risk-transfer programs, pay private entities to bear some of the credit risk," the FHFA said. ere are three types of costs the enterprises expect to incur by providing their guarantee, the report said. First is the cost of borrowers not mak- ing their payments. Second is the costs of holding economic capital to protect against potentially much larger, unexpected losses as a result of fail- ure of borrowers to make their payments. ird is general and administrative expenses. e FHFA also explained that there are two types of guarantee fees: ongoing and upfront. Ongoing fees are collected each month over the life of a loan, while upfront fees are one-time pay- ments made by lenders when a loan is acquired by an enterprise. "Fannie Mae refers to upfront fees as loan level pricing adjustments, and Freddie Mac refers to them as delivery fees," the report said. "Both ongoing and upfront fees compensate the Enter- prises for providing credit guarantees. To date, the Enterprises have relied primarily on upfront fees to reflect differences in risk across loans as opposed to ongoing fees." With recent improvements in the housing market, the FHFA has decided to remove the 25 basis point upfront Adverse Market Charge instituted in 2008 for all states, effective with Sep- tember 2015 loan deliveries. ey plan to replace this revenue by making targeted increases to a subset of loans, including some higher risk loan segments and those with both high credit scores and low loan-to-value (LTV) ratios. "In April 2015, FHFA completed a compre- hensive review of the agency's policy for guarantee fees charged by the Enterprises to lenders," the FHFA said. "FHFA decided not to change the general level of fees. However, FHFA made cer- tain minor and targeted fee adjustments. Overall, the set of modest changes to guarantee fees is roughly revenue neutral and will result in little or no change for most borrowers." The combined amount of money that 6.5 million borrowers could save via refinancing. About 6.1 million of them could save through traditional refinancing, while an estimated 450,000 of them could save through the government's Home Affordable Refinance Program (HARP). Source: Black Knight Financial Services STAT INSIGHT $1.66 Billion

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