Good afternoon —
Yesterday I asked for your feedback on the money Fannie and Freddie made through the adverse market fee in 2020-2021. When all was said and done, the GSEs netted $5.3 billion through that fee, and I asked readers to weigh in on whether this was a prudent move to mitigate risk, or something else. As always, I got some great feedback.
The majority of lenders who wrote me saw it as a blatant money grab. John Meussner, a production manager for Mason McDuffie in California summed up the general sentiment on that side with his comment:
The adverse fee was a joke – it took the risk of loans already in place with notes agreed upon and placed an unnecessary cost on extremely well qualified borrowers, and now that rates have spiked, borrowers will likely be paying that premium in the form of a higher rate for a lot of time to come…Current GSE estimates on losses are likely exaggerated as homes continue to appreciate at a high rate in most markets, and owners will sell before they foreclose.
On the other hand, an attorney from Houston echoed what several with a different viewpoint wrote:
It was a prudent risk management step by the FHFA to mandate the GSEs implement that fee. The GSEs didn't come up with this on their own (as your article infers).
I talked with Eric Kaplan, senior advisor at the center for financial markets at the Milken Institute, about this topic and he pointed out that the move illustrates the very complicated role of the GSEs as public-private hybrids.
Implementing a fee to recoup the projected revenue they were going to lose due to forbearance is exactly what a prudent private company would do, Kaplan said. Yes, the GSEs had $59 billion in capital, but that's still significantly undercapitalized and not nearly enough to get out of conservatorship. Without the adverse market fee, "this would have been a loss or profit reduction of over $5 billion at a time when it was critical that they build up their capital," Kaplan said.
"If you say, well that's going to increase the cost of credit to consumers by a certain amount — well, that's true also. It's money out of consumers' pockets at a very difficult time. And so it goes back to the age-old question around housing finance reform with respect to Fannie and Freddie: What are they supposed to be?"
13 years after the GSEs were placed in conservatorship, that's still the hardest question to answer.
Until tomorrow —
Sarah Wheeler
HousingWire Editor in Chief
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