FHFA Proposes State-Level Guarantee Fee Pricing

Freddie Mac Fannie Mae FHFA

On September 25, the FHFA published a notice and request for comment on its proposal to set risk-based guarantee fees by state. The proposal identifies five states—Connecticut, Florida, Illinois, New Jersey, and New York—that have substantially higher default-related costs than the national average. The proposed methodology for state-level guarantee fees considers three factors (i) the number of days it takes Fannie Mae or Freddie Mac to obtain marketable title, (ii) the average per-day carrying cost incurred by Fannie Mae or Freddie Mac, and (iii) the national average default rate on single-family mortgages. The FHFA is proposing to charge lenders an upfront fee of between fifteen and thirty basis points on each new mortgage originated in the five higher-cost states, beginning in 2013. The actual increase in the upfront fee would vary for each state, depending on default data in the state and the state’s deviation from the mean of the state-level estimates of expected total default-related carrying costs. The proposed approach is based on the expected costs of defaults on mortgages acquired by Fannie Mae and Freddie Mac in the future given current underwriting standards, rather than actual default losses realized over the past decade. The FHFA also states that its methodology for determining increased state-level fees could change in the future to consider other factors, including the impact of recently-enacted laws and ordinances or a wider range of state actions. The FHFA has asked for comments on the proposal by November 26, 2012.