In a mortgage market where assurances are few and far between, the value of a guarantee is reaching new heights.
That is good news for Fannie Mae, and means one more margin pinch for the lenders that sell their loans to the government-sponsored enterprise.
Fannie told investors last week that its guarantee fees on new business now average about 30 basis points, which observers said was the highest level in at least a decade. By comparison, the average fee across Fannie's guarantee portfolio was about 22 basis points last year and in the first nine months of this year.
The increase reflects how the turbulence in mortgage markets (both primary and secondary) has given Fannie a much stronger bargaining position with lenders, analysts said.
Tom Lund, the executive vice president of Fannie's single-family mortgage business, said on a conference call Friday that the increase amounted to "a pretty significant pricing change," and that despite higher delinquencies, Fannie still has "a lot of credit enhancements" on loans that were originated this year and last and have high loan-to-value ratios.
The fees, which compensate the GSE for guaranteeing timely payments to investors in mortgage-backed securities, are built into the coupon rate of a loan. The higher the guarantee fee, the less interest income from a pool of loans is available for the servicer after bondholders are paid.
David Hochstim, an analyst at Bear Stearns & Co., said Fannie is clearly demonstrating that it has pricing power, because "price increases typically don't stick if customers don't pay."
Fannie said last week that it guaranteed 41.2% of new mortgage-backed bond issues last quarter, against 23.3% a year earlier.
"It's essential that fees be increased to reflect the higher risk in the market, so for them to maintain an adequate return, they have to have higher revenue," Mr. Hochstim said. "The fact that they are able to raise fees and are gaining market share is reflective of the value of the liquidity they provide."
Terry Wakefield, the chief executive of Wakefield Co., a Grafton, Wis., mortgage consultancy, said Fannie's 30-basis-point average guarantee fee is "the highest I've seen in 10 years."
That is "not a good sign" for the market, he said. However, "given the factual increase in foreclosures and delinquencies, I don't know how anyone could argue that a fee increase is imprudent. The g-fee has to reflect reality."
Brad German, a spokesman for Freddie Mac, said the GSE has not raised its guarantee fees. In a September presentation to investors, Buddy Piszel, Freddie's chief financial officer, said its guarantee fees averaged 17.5 basis points in the second quarter.
"The current credit market situation presents us with the opportunity to regain some pricing power," Mr. Piszel said then. Mr. Hochstim said he expects Freddie to announce a fee hike next week, when it reports third-quarter results.
Similarly, Mr. Wakefield said that the GSEs "are notorious for following one another. I would be shocked if" Freddie "didn't raise their fees too."
In 1982, when Mr. Wakefield worked as consultant to Fannie on an early mortgage-backed security, guarantee fees averaged 25 basis points, he recalled.
But during the late 1990s, Fannie and Freddie both cut deals with lenders under which a GSE would get most of a lender's eligible business. By 1999 the average fee in Fannie's guarantee business was down to about 19 basis points, and it would stay at that level through 2002.
Fannie did not say on the call whether it would offer discounts to its largest customers. A Fannie spokeswoman did not return a call and e-mail Monday seeking comment.
Enrico Dallavecchia, an executive vice president and the chief risk officer at Fannie, said on the call that the new 30-basis-point average fee offers "a lot of margin to cover projected increased losses."
Daniel Mudd, Fannie's president and chief executive, said on the call that a projected 4% national decline in home prices would result in Fannie's credit loss ratio rising from the current 4 to 6 basis points to 8 to 10 basis points next year. "I think a lot of the correction in the mortgage market is happening quickly, and while all of this is painful, the recovery will start sooner," he said.
"Do we plan for scenarios that might be significantly worse? Yes," Mr. Mudd said.
But "that correction is creating some opportunities for us," he said.
Michael Quinn, a senior vice president and the single-family risk officer at Fannie, said on the call that Fannie had also raised its guarantee fees in the second quarter on loans with FICO scores below 680.
Nandu Narayanan, the founder and chief investment officer of Trident Investment Management in New York, said in an interview Monday that the hike in guarantee fees was "too little too late."
On the call, Mr. Narayanan had asked Fannie executives whether private mortgage insurers would survive the current downturn and whether Fannie had projected a worst-case scenario if the insurers were unable to cover the 20% or so of the loan that they guarantee.
Mr. Dallavecchia replied, "Despite a deterioration in earnings, we believe the mortgage insurance industry will manage its exposure."
In the interview, Mr. Narayanan said that mortgage guarantors of all stripes are currently in the position of writing flood insurance in a flood-prone area, and that Fannie's raising its fees "isn't going to stop the flood."
