Is Fannie Mae profiteering off riskier borrowers?
By JEFF LAZERSON / CONTRIBUTING COLUMNIST
I am usually wrong. I know this because my wife points it out to me.
So, I assumed I had goofed again when a Fannie Mae official told me I was off-base in a recent column about the agency piling on pricing for low down-payment borrowers with private mortgage insurance and low credit scores. Fannie prices for the risk, the official said.
I figured I’d just fall on my sword, eat crow and be forgiven.
But first, I wanted to know what evidence Fannie had that I was wrong. Why does it need to charge you more points on top of charging mortgage insurance because there was more pricing risk?
Is that justified? Or, are they just profiteering?
Fannie gave me a curveball of broader data. But in the end, I got nothing to support their assertion. Transparency at its finest.
Just last week Chase Bank announced a plan to sell almost $1.9 billion dollars in mortgage backed securities, even though 75 percent of those loans are agency eligible (meeting Fannie Mae and Freddie Mac standards).
Bottom line is, I think, Chase is testing the waters, probably believing they can be more profitable by not selling to Fannie Mae because of Fannie’s generous pricing markup. This is the first time I’ve ever seen any lender thinking they could be better priced than a government sponsored enterprise.
Fannie Mae charged an average of 51 basis points for Guarantee Fees (includes those risk-based pricing markups), according to a Fannie Mae spokesperson. Fannie Mae booked over $411 billion in 2015.
One-half point on $411 billion dollars (which is separate from the points your local mortgage originator charges) is a boatload of revenue for Fannie and Uncle Sam, which owns Fannie (and Freddie) in conservatorship.
“It’s a valid complaint,” said Guy Cecala, CEO of Inside Mortgage Finance when asked if Fannie is making it less affordable for low-wealth borrowers through additional pricing charges after already making homeowners protect it by purchasing mortgage insurance.
Crazy enough? Hold on. I have more. This week, The Wall Street Journal reported that Fannie and Freddie will cut the mortgage balances for thousands of distressed homeowners.
Yes, you have this schizophrenic thinking correctly. Stick it to riskier borrowers that have smaller down payments and really stick it to those low down-payment borrowers with lower credit scores by charging them even more for the loan.
This, of course, puts more pressure on the poor borrowers to come up with more closing costs and less affordable monthly payments.
But don’t worry about it because maybe, just maybe, after you are under water and financially distressed, we might throw you a lifeline via principal reduction. But only during an election year.
Usually wrong means being right sometimes.
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Jeff Lazerson - Mortgage Columnist since 2011