The guarantee fees collected by Fannie Mae and Freddie Mac could be used as a tool to moderate the boom and bust cycles in the housing market, according to a new report by a Treasury Department office.
The Office of Financial Research is urging the Federal Housing Finance Agency to adjust guarantee fees to influence borrowing costs in the housing market.
“The key advantage of using G-fees is that the impact is transparent, because an increase in borrowing costs can have a direct and material effect on borrowing,” OFR said in its annual report issued in December.
At issue is lowering guarantee fees when credit is tight — as it is now — while raising them when lending is abundant. One study cited by OFR shows that a 25-basis-point reduction in guarantee fees would result in a 15% increase in lending based on a 4% mortgage rate. Another study estimates that “for every basis point increase in G-fees, mortgage rates increase by 2.5 basis points, in which case the effects would be ever larger,” OFR says.
Freddie currently charges a 57.2-basis-point guarantee fee on its single-family loans in the third quarter and Fannie charges a 63.5-basis-point fee.
The OFR is working on a paper that will design a housing condition index and suggest ways to appropriately set countercyclical guarantee fees.
“The index, which combines a large number of housing data series, is normalized to a value of 100 in March 2003, when housing finance conditions were relatively stable and healthy,” the OFR annual report says.
A report by Federal Financial Analytics in early December noted that the OFR and FHFA have discussed this countercyclical approach to setting G-fees.
“Will FHFA take it on? We expect it will give itself considerable flexibility in its pending G-fee rule not so much to make OFR happy as to keep its hands free to do as desired as market conditions and political winds demand,” FedFin said in a Dec. 5 report.