FHFA Director Defends New Fee, Capital Framework to Congress
Written By: Joel Palmer, Op-Ed Writer
The director of the Federal Housing Finance Agency (FHFA) was questioned last week by the House Financial Services Committee about the agency’s response to COVID-19.
In particular, Director Mark Calabria had to defend a fee the agency announced to recoup some of the costs associated with the pandemic.
In August, FHFA directed Fannie Mae and Freddie Mac to start collecting an “adverse market fee” on refinance mortgages. The 0.5 percent fee was scheduled to be implemented September 1 but was delayed until December 1 because of feedback from the committee.
FHFA said the fee will only apply to refinance mortgages, not purchase loans. In addition, loan balances below $125,000 are exempt, as are those refinanced through Home Ready and Home Possible. Calabria said these exemptions should limit the impact of the fee on low-income borrowers.
FHFA said the fee is needed to cover the estimated $6 billion in expenses that Fannie and Freddie have incurred because of COVID-19. Calabria also testified that the Congressional Budget Office is projecting a $10 billion hit to the enterprises’ annual earning in 2020 because of the pandemic.
Calabria noted that during the pandemic, Fannie and Freddie have offered forbearance on mortgages, purchased loans in forbearance, modified mortgage terms to reduce monthly payments, provided protections for renters in properties in forbearance, and provided loan processing flexibility.
“The losses this fee covers are the result of policies that have helped millions of Americans stay safe in their homes during a global pandemic. Although Congress has not provided any funding to offset the costs of these policies, the enterprises’ congressional charters require that expenses must be recovered via income,” said Calabria.
He added: “Delaying this fee will help provide certainty to the market and borrowers; however, the total amount raised through the fee will be unlikely to cover the cost of enterprise assistance to borrowers and renters during the pandemic. Low mortgage rates have already significantly elevated the rate of enterprise refinance acquisitions, and delaying the fee reduces the number of transactions the cost can be spread over.”
Despite Calabria’s justifications for the fee, Maxine Waters (D-CA), chairwoman of the committee, strongly criticized the fee.
“Instead of focusing on how to help homeowners and renters and how to support the housing market during this national emergency, Director Calabria’s actions suggest that he is first and foremost interested in filling the coffers of Fannie Mae and Freddie Mac so that he can continue to move forward with his plans to release them from conservatorship,” she said.
Waters also questioned the new capital framework for the GSEs that FHFA announced in May. She said it should not be implemented during the pandemic.
“Not only is the timing of this major change inappropriate because it would cause serious market disruption in the middle of a recession, but many have raised concerns that these changes would actually make the housing market less prepared for the next economic crisis,” she said.
The new framework targets an eventual 25 to 1 leverage ratio, or capital equal to roughly 4 percent of adjusted total assets. Calabria said this is the amount of capital the enterprises need to absorb losses and remain viable should a repeat of the 2008 housing crash occur.
“FHFA’s strong response to COVID does not mean that all is well. Most notably, the Enterprises lack the capital to withstand a serious housing downturn. This jeopardizes their important mission to support borrowers in housing finance markets during periods of stress,” said Calabria.
“Meeting the requirements in this capital framework, when combined with effective prudential supervision, will make Fannie Mae and Freddie Mac financially safe and sound. That must be our goal.”
Other members of the committee expressed a lack of support for ending federal conservatorship of Fannie and Freddie.
“They’ve done very well and have made money to the taxpayer in their current situation,” said Rep. Brad Sherman, D-Calif, during the committee testimony. “If it’s not broke, we don’t need to fix it.”
Calabria responded that he has a legal obligation to release the GSEs from conservatorship. “By law these are not government agencies,” Calabria said.
“By law they are private companies and I have to follow the law whether I think it makes sense or not.”
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
