As late as March 2007, when home prices were teetering on the lip of a 35 percent collapse, Freddie Mac was telling its doomed investors that competition was
Half a decade later, with mortgage finance almost entirely sponsored by the government, the question is how high compensation for credit risk must go before the private sector returns in force.
Regulators took an important step toward finding out in August, when they announced that they had directed Freddie and its sister enterprise, Fannie Mae,
The move had long been telegraphed by the Federal Housing Finance Agency, Fannie and Freddie's overseer and conservator since their failure in 2008, and tracked with the
Overall, guarantee fees are as high now as they have been at any point during roughly the last decade (see the top chart), partly reflecting price increases Fannie and Freddie implemented in early 2008 as the housing market fell apart. (The increases announced in August will be rolled out beginning in November, and will take years to wash through Fannie's and Freddie's portfolios since existing mortgages are subject to rates set when they closed. The increases associated with the payroll tax cut were implemented in April.)
Compared with guarantee fees that averaged 27 basis points during the first half at Fannie and 24 basis points at Freddie, a pair of 10-basis-point hikes seem substantial, particularly in combination with
By the standards of the average 22 basis points for Fannie and 18 basis points for Freddie in 2006, when private lenders accounted for about 70 percent of originations and 60 percent of outstanding mortgage balances (see the bottom chart), they are even more substantial. The guarantee fee figures here are based on financial reports by the government-sponsored enterprises during about the past ten years, a period marked by multiyear restatements and massive changes in accounting practices. Also, fluctuations in g-fee figures often are largely explained by changes in interest rates, which drive the pace of refinancing and determine the periods over which upfront portions are recognized.
But, with the mortgage meltdown so close in the rearview mirror, the right price for private capital is a moving target. Much depends on regulations over legal liabilities and risk retention requirements for originators that are still in flux, in addition to the nature of government support that will succeed the current arrangement.
Some analysts expect the transition to a new system to take at least a quarter century.