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NHC Proposes End To Flat Guarantee Fee Structure

Keith Griffin
Aug 15, 2023

Says risk-based pricing has ‘outlived its purpose.’

The National Housing Conference (NHC) is calling on the Federal Housing Finance Agency (FHFA) to return to a flat guarantee fee (G-fee) structure, eliminating the current pricing grid that charges homebuyers different fees based on their down payment. Additionally, NHC called upon FHFA to reduce the Enterprise capital requirements based on accurate assumptions of real risk.

“Risk-based pricing through loan level price adjustments (LLPAs) has outlived its purpose,” said David M. Dworkin, president and CEO of the National Housing Conference. “To create a fair playing field for first-time homebuyers across all income levels, Fannie Mae and Freddie Mac should charge the same G-fee for everyone, as was the practice between 1938 and 2008, and as FHA loans do today.”

In the 11-page letter, NHC emphasized the need for a judicious equilibrium – excessively low G-fees can precipitate unfavorable outcomes like those witnessed in the 2008 financial crisis. Conversely, inflated G-fees can drive consumers to the government-backed GNMA market, increasing taxpayer liability and limiting choices for less affluent homebuyers.

Noting that two key factors influence G-fee pricing, capital requirements and return on capital, NHC expressed concerns that the current approach is overly complicated and places FHFA in the position of “unnecessarily picking winners and losers among housing consumers.” Founded in 1931, the NHC is America's oldest and broadest housing coalition.

“We strongly believe that loan-to-value (LTV) is equally ineffective as a risk measurement when considered without a wide range of compensating factors,” continued Dworkin. “All risk measurements, whether debt to income ratios, LTV ratios, or credit score, to name a few, are somewhat predictive of individual loan performance. But none are meant to stand alone. Together they present a much better indication of loan performance, and this can be further mitigated by quality homebuyer counseling, competent risk management, and above all, responsible mortgage products.”

Further, NHC argued that the existing capital requirements are “unnecessarily high, designed to facilitate an administrative release from conservatorship that would leave the Enterprises less competitive, serve lenders less effectively, and deny many qualified homebuyers access to mortgage finance in all market conditions.”

NHC’s letter notes that the worst-case scenario assumes a total comprehensive loss of income of $8.4 billion. Yet under the ERCF, the Enterprises together would be required to hold approximately $319 billion in adjusted total capital. “Even if the losses from a future crisis with five times the impact of the 2008 financial crisis were to occur, costing the Enterprises a total of $42.25 billion, under the ERCF they would be required to hold $276.75 billion in unnecessary capital,” the letter says.

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