Increase Guarantee Fees Charged by Fannie Mae and Freddie Mac

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are government-sponsored enterprises (GSEs) that were federally chartered to help ensure a stable supply of financing for residential mortgages, including those for low- and moderate-income borrowers. Over the past 40 years, Fannie Mae and Freddie Mac have carried out that mission in two main ways: by issuing and guaranteeing mortgage-backed securities (MBSs) and by buying mortgages and MBSs to hold in their portfolios. The two GSEs provided credit guarantees for more than 60 percent of home mortgages originated in 2010, and they also purchased and retained mortgages.

In September 2008, the federal government took control of Fannie Mae and Freddie Mac in a conservatorship process after falling housing prices and rising mortgage delinquencies threatened the GSEs' solvency, impairing their ability to ensure a steady supply of financing to the secondary mortgage market. With that shift in control, the Congressional Budget Office concluded that the institutions had effectively become government entities whose operations should be reflected in the federal budget.

This option would require Fannie Mae and Freddie Mac to raise the average guarantee fee they assess on loans in the MBSs they issue by 5 basis points (100 basis points are equivalent to 1 percentage point) and to raise the effective guarantee fee on loans acquired for their portfolios by the same amount. Those increases, constituting roughly a 20 percent rise in fees, would reduce federal costs for the GSEs by $11 billion over the 2012-2016 period and by about $27 billion from 2012 to 2021.

The main advantage of raising guarantee fees would be to reduce the projected costs of conservatorship. CBO esti mates that the mortgage guarantees the GSEs issue over the 2012-2021 period will cost the federal government nearly $50 billion on a fair-value basis with fees at their current levels. (That amount reflects the estimated federal subsidies inherent in the guarantees at the time they are made--that is, the up-front payment that a private entity in an orderly market would require to assume the federal responsibility for the GSEs' obligations.) Increased fees on the guarantees would reduce those costs. The higher fees would probably flow through to borrowers in the form of higher mortgage rates; however, rates on 30-year fixed-rate mortgage loans eligible for purchase by Fannie Mae and Freddie Mac are relatively low, about 5 percent, in early 2011. This option would provide the GSEs with flexibility in setting fees for particular borrowers, so the potential would exist to minimize the adverse effects of the higher fees on low- and moderate-income borrowers. Coordination with the GSEs' regulator, the Federal Housing Finance Agency, would be necessary to ensure that the increase in average fee income represented an increase in the rates charged to borrowers with particular risk characteristics and not a shift toward lending to riskier borrowers, who already pay higher-than-average rates. Another advantage of this option is that it would help address the current underpricing of risk, which could shift the allocation of capital too far toward housing and away from more productive activities.

The main disadvantage of raising guarantee fees would be the consequent increase in the cost of borrowing, which could somewhat reduce demand for housing. Another drawback would be more limited refinancing opportunities, which might constrain spending by consumers. Both of those concerns would be particularly salient as long as housing markets and the economy remain weak.