Publication DateSeptember 2014
Author(s)Kevin A. Park
The first part of our commentary provides analyses and models that underpin our responses. The second part provides answers to the specific questions asked in the Request for Input.
With respect to the proposed changes in guarantee fees, we favor greater risk pooling that enables more uniform pricing across the housing cycle and different housing markets. Consequently, we support removing the adverse market delivery charge and are against state-level pricing adjustments. These charges exacerbate volatility in the housing market by increasing the price of credit in housing downturns and depressed markets, which reduces demand for housing.
We favor flattening the loan-level pricing curve by partially offsetting the risk-based components of the guarantee fee (expected losses and capital reserves) with a purpose-based return on capital for targeted segments, consistent with Enterprises’ charter. We recommend that the Enterprises’ return on capital be based on the appropriate benchmarks in light of the unique structure and purpose of the Enterprises.
In terms of expected and unexpected losses, estimating the level of guarantee fees should be based on empirical information on the actual losses and populations served by the Enterprises. Further, to this end, the Federal Housing Finance Administration (FHFA) should make meaningful steps to improve the transparency of guarantee fee pricing.
Our analysis finds substantial room for improving pricing, especially for high LTV, purchase money mortgages, which disproportionately serve low- to moderate- income, first-time and minority households with access to sustainable homeownership.