As the Federal Housing Finance Agency (FHFA) mulls over a proposed increase in fees charged by the GSEs to provide guarantees on mortgage-backed securities (MBS), a new report from the Urban Institute (UI) suggests the agency faces a more difficult task than one might assume.
In a commentary released Thursday, UI authors Laurie Goodman, Ellie Seidman, Jim Parrott, and Jun Zhu say that, based on their modeling, g-fee determination "is an art, not a science—and more like a Jackson Pollock than a da Vinci."
Breaking down information released by FHFA in early June in a request for public input, the team at UI determined there are three crucial assumptions the agency must make when calculating an appropriate number for g-fees: whether or not to count future g-fee premiums as capital, what return on equity to assume, and what kind of capital buffer Fannie Mae and Freddie Mac need beyond what is required to cover expected losses in a stress scenario.
With all of those assumptions open to interpretation—and every interpretation making "a huge difference in the results"—the group draws several conclusions from its research, the first being that "[t]here is no room to increase fees for the safest loans."
"Under any reasonable set of assumptions, raising the fees for the least risky borrowers will result in adverse selection, with banks keeping the highest quality loans on their own balance sheets and selling only higher-risk loans to the GSEs," the researchers said.
For loans with more risk, the team says deciding the most appropriate fee will depend on which of the three assumptions are made in the process.
Finally, the group said the GSEs' mission—to provide a stable source of funding for home mortgages nationwide—should guide the way forward in determining capital requirements.
"In this context, the results of our modeling indicate that the FHFA could justify a modest reduction in pricing for the more risky loans, depending on the results of the GSEs' internal modeling, which will be superior to ours," they said.
The UI commentary comes as the window closes for industry participants and analysts to comment on a proposed hike in g-fees originally announced last year by former Acting FHFA Director Edward DeMarco. Upon taking over his post in January, Director Mel Watt announced the agency would suspend any increases until he could determine how the market would be impacted.
Having been reintroduced in June, the issue is open for public input until September 8.
A group representing private mortgage insurers also threw in its two cents on g-fee hikes this week.
In an open comment, U.S. Mortgage Insurers, a trade group founded by some of the nation's largest mortgage insurance (MI) firms, said a workable g-fee framework must account for MI when pricing credit risk in order to avoid overcharging consumers.
"MI is a well accepted and well regarded form of credit enhancement that has made homeownership possible for millions of people who otherwise would not have qualified for mortgage loans," the group said. "Full recognition of MI should reduce the cost of mortgages with MI, and create stronger incentives for credit risk to be served by private capital in a competitive market."