There's a conversation happening right now within the housing industry about how best to manage risk inside the government-sponsored enterprises Fannie Mae and Freddie Mac. It's a good one to have.
But while we work to solve these complex problems, homebuyers are paying a steep price at the closing table in the form of unnecessary fees that, for some, put homeownership out of reach.
How did we get here? It started in 2008, when the Federal Housing Finance Agency and the GSEs implemented loan level price adjustments, or LLPAs. Loan-level price adjustments are fees paid by the borrower either as part of upfront closing costs or over the life of the mortgage. They were intended to help the GSEs manage risk.
To be clear, NAR believes that FHFA and the GSEs should continue taking responsible steps to manage their risk exposure. However, we also believe the GSEs can do so even after reducing or eliminating LLPAs.
Three significant factors have led us to this conclusion: improved mortgage credit quality, stricter regulations on risk management within the industry, and the fact that guarantee fees, or "g-fees," charged to homebuyers have risen steadily since 2011 to cover Fannie and Freddie's risk exposure.
We are not alone in this belief either.
Earlier this year, the National Association of Realtors — along with 24 other organizations — sent a letter to FHFA Director Mel Watt on the need to reduce or eliminate LLPAs.
We didn't find agreement from FHFA. To the contrary, the FHFA released a report on the fees charged by the GSEs finding "no compelling economic reason to change the overall level of fees."
This is a politically safe position for Director Watt, but it doesn't make sense for consumers.
Like NAR, Director Watt has called on Congress to address housing finance reform, finding the ongoing conservatorship unsustainable. At the same time, the GSEs have a mandate to provide broad access to mortgage credit. Unfortunately, their overly burdensome fees are standing in the way of that mission.
It's important to remember that LLPAs aren't the only fees the GSEs charge to borrowers. Guarantee fees are also in place to help the GSEs manage the risk of guaranteeing loans.
Those fees have risen sharply since 2009, jumping 164% from 2011 to 2014 and bringing them to nearly 60 basis points today. What's odd is that these price increases — ostensibly intended to manage risk — have continued even as the portfolio of loans guaranteed by the GSEs has grown stronger, exposing the GSEs to less risk.
The result is that borrowers of conventional mortgages will potentially pay both LLPAs and g-fees when purchasing a home. This redundancy is unequivocally pricing qualified borrowers out of the conventional market, undermining the mission of the GSEs in the process.
There's no mystery as to how we got where we are today. Former FHFA director Ed DeMarco gambled on a policy to bring back the private label securities market by directing the GSEs to raise fees. It was not to protect against borrower default risk but to boost yields and make returns more attractive to other financial institutions.
This policy to encourage private market participation ignored the dislocation and distrust among Wall Street bond dealers and investors that continue to drive the lack of a private label securities market. NAR noted then that the increases would result in billions of dollars of profits for the GSEs, not a return of the private label securities market, and that's exactly what we've seen.
That doesn't mean we're stuck here forever. With the new "Duty to Serve" regulation, FHFA has an opportunity to recognize and rectify the issue. To that end, both Fannie and Freddie created mortgage products in 2015 that capped fees for particular borrowers in recognition of this concern, but these programs are limited in reach and won't do the job on their own.
It doesn't take an expert in risk modeling to recognize that expected losses over the last few years were widely overstated, leading to loan loss reserve releases quarter after quarter.
Put simply, the GSEs were charging homeowners for far more risk than they took on, driving tremendous profit.
This shouldn't surprise anyone. Rigorous underwriting standards are now in place, ensuring fully documented and high-quality mortgages at the GSEs. Steps have also been taken to enhance the reliability of mortgage insurers, generally support industry standards for loan data transparency, and drive fraud and predatory loan products out of the system.
The GSEs have a duty to serve the public by facilitating the availability of affordable mortgage credit to all qualified borrowers. That means ensuring affordable mortgage opportunities, especially for first-time homebuyers and low- and moderate-income families.
Excessive and unnecessary fees fly in the face of that mission.
We will continue this push, along with other efforts to open the credit box for responsible home buyers. In the meantime, millions of potential homeowners are being stymied in pursuing their American Dream.
Tom Salomone is the president of the National Association of Realtors.