Optimal Blue clients know that rate sheet prices are basically composed of security prices, loan-level price adjustments, servicing values, and profit margins. So it of interest when any of those change much, and by choice, so folks took notice when the FHFA announced the completion of its review of the guarantee fees (G-Fees) charged by the GSEs. FHFA found “no economic reason” to alter the baseline G-Fee; however, it has ordered the removal of the 25bps Adverse Market Delivery Fee and the targeted adjustment of fees charged for certain loan types.
And so the comprehensive Fannie Mae and Freddie Mac guarantee fee review is finished, and it looks like not much is going to change. The 25 basis point adverse delivery fee is gone, but there are new fees imposed, so it looks to be more or less a wash. Borrowers with lower credit are going to pay slightly less, while high balance investment properties & cash-out refis will become slightly more expensive.
Borrowers with weaker credit will pay slightly lower fees, while most others will see prices remain the same. Certain riskier loans, such as those on investment properties, those over $417,000 and cash-out refinances will become incrementally more expensive. “The FHFA has determined that current fees, on average, are at an appropriate level,” the agency said in a statement. Even with the changes, fees on average remain about twice 2009 levels – and we all remember the increases under Ed DeMarco meant to crowd in private capital. Watt is repudiating, in some measure, that approach.
The companies will eliminate an “adverse market” fee of 25 basis points that they began charging all borrowers after the financial crisis. They’ll raise fees by the same amount for borrowers with credit scores above 700 and at least 20 percent equity in their homes, meaning the changes will be a wash. Borrowers with weaker credit or less equity won’t see an increase, so their payments will fall by 25 basis points. Mortgages over $417,000 will go up 25 basis points, and some higher-risk loans will increase 37.5 basis points.
The 25 basis point AMDC will be removed for all loans, but offset by 25bp increase for <80 LTV, >700 FICO loans, effectively leaving their LLPAs unchanged for those borrowers. This leaves only >80 LTV and <700 FICO borrowers with a 25bp reduction. Approximately 41% of conventional issuance falls under this criteria. The equivalent rate decrease for these borrowers is about 5 basis points. Investor, Jumbo, cashouts and those with secondary financing see their LLPAs increased 37.5bps (about 7bps rate equivalent increase). For TBA securities – used by plenty of Optimal Blue clients for hedging and delivery – the cheapest to deliver loans fall into the <80 LTV > 700 FICO bucket so there should be no impact. The market was pricing in a possibility of higher LLPA reductions so the announcement should be supportive of higher coupons.
For jumbo conforming product the 37.5bps LLPA increase stands to raise borrower costs by 7bps resulting in a 2-4 CPR decline in speeds. Model estimates indicate upside up to a quarter point, especially in 3.5s and 4s.
Analysts say that these changes reflect a highly market sensitive and gradualist regime at the FHFA, in contrast to broader market concerns about Watt’s new leadership. It appears that there are limited policy options to lower borrowing costs given lack of GSE capital. Starting in September there will be modestly higher borrowing costs for a handful of better-credit borrowers and modestly lower costs for marginal credit and leveraged borrowers. One thing it does, however, is remove uncertainty as to what may happen with Agency pricing – and that is a good thing.