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Banking groups urge end to risk-based price adjustments on Fannie and Freddie loans

The nation’s biggest banking and housing trade associations say it is time for Fannie Mae and Freddie Mac to reduce or end a recession-era fee charged to riskier borrowers.

In a letter Wednesday to Federal Housing Finance Agency (FHFA) Director Mel Watt, a coalition of 25 groups said changed times in the mortgage industry warrant a reduction or the end to loan-level price adjustments (LLPAs) for the nation’s most popular loan types. FannieMae3(3)

Fannie and Freddie have charged the fee since 2008 as another hedge against default risk and to raise revenues. Basically, a borrower will pay a higher interest rate over the course of the loan depending on their perceived risk level. 

The fee varies by borrower and takes into account credit scores, the downpayment size and other factors. Some borrowers can pay up to 4 percent of the loan value in LLPAs.

 The letter argued that the overall mortgage market is more stable, and the quality of loans is higher today from increased regulations under the Dodd-Frank Act. The letter cited the enhanced reliability of private mortgage insurers and improved loan performance as reasons to lower or eliminate the fee.

The letter also said the LLPAs have been disproportionately taxing low-to-moderate income borrowers and first-time homebuyers. Fannie and Freddie also charge guarantee fees (g-fees) to hedge against default risk, which increased significantly after the downturn. 

Major industry trade associations signed the letter, including the Mortgage Bankers Association, the American Bankers Association (ABA) and the National Association of Realtors. Other co-signers included the NAACP and some consumer-advocacy organizations.

The letter was timed as a comment to FHFA's proposed "Duty to Serve" rule, which lays out targets for the government-sponsored enterprises (GSEs) in facilitating financing for affordable housing in underserved areas. As Fannie Mae and Freddie Mac's regulator, the FHFA has the power to reduce fees charged to borrowers in loans purchased by the GSEs.   

“The crisis period is abated,” said Bob Davis, ABA’s executive vice president of mortgage markets. “If you look at the change in quality of mortgage originations that is the result of Dodd-Frank, there is just less risk there. The loan-level price adjustments basically were set in place when there was a riskier portfolio.”

Not all mortgage-industry trade groups signed onto the letter calling for a fee cut, however. The Community Mortgage Lenders of American (CMLA), Community Home Lenders Association (CHLA) and some other groups that support rebuilding Fannie and Freddie’s capital buffers did not sign the letter.

"CHLA has previously signed on to numerous letters urging lower g-fees and LLPAs, commensurate with risk, but our more immediate focus is on the more urgent need for FHFA to suspend dividend payments, to build the GSEs' capital buffer and avoid a Treasury draw," CHLA Executive Director Scott Olson said.

CMLA’s Executive Director Glen Corso said “any adjustment to the fees has to take into account the financial condition of the GSEs” and their likelihood of taking a draw.  


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