The FHFA’s New Fee Policy Will Place Even More Upward Pressure On Home Prices

In January, the Federal Housing Finance Agency (FHFA) announced that it would increase the upfront fees that Fannie MaeFNMA
and Freddie Mac charge for mortgages on second homes. In October, the agency announced it would implement “targeted increases to the upfront fees for most cash-out refinance loans.”

Both moves are good for federal housing finance policy. The federal government should not be in the business of making it less expensive for people to buy second homes, and federal lending subsidies shouldn’t be further rewarded with easier equity cash-outs.

Still, the housing lobbyists–who, of course, opposed these changes–can rest easy. The Biden administration isn’t on the verge of shutting off the federal spigot.

In fact, as part of its ongoing review of Fannie’s and Freddie’s guarantee fee framework (their g-fees), the FHFA is also eliminating the upfront fees for several single-family home programs. These changes are bad housing finance policy. Here’s a quick rundown of the fees that the FHFA will eliminate.

• First-time homebuyers at or below the area median income (AMI) in most of the United States (and below 120 percent of AMI in high-cost areas).
• HomeReady and Home Possible loans (Fannie’s and Freddie’s flagship affordable mortgage programs).
• HFA Advantage and HFA Preferred loans (Fannie’s and Freddie’s low down payment loans available to eligible Housing Finance Agencies).
• Single-family loans supporting the Duty to Serve program.

According to the FHFA, the agency is eliminating these fees to “promote sustainable and equitable access to affordable housing.” The timing is strange, though, given the administration’s supposed commitment to fighting inflation.

Eliminating these fees will not make housing more affordable. They might make mortgages easier to obtain, but they will place upward pressure on home prices, especially those in the lower tier of the market.

These changes also demonstrate just how little the American housing finance system resembles a free market.

For perspective, Fannie and Freddie combined have had no less than a 50 percent share of all mortgage originations since 2007. And their share currently stands at 62 percent. Their share of the total mortgage-backed securities (MBS) market, according to the Securities Industry and Financial Markets Association (SIFMA), averaged 70 percent from 2009 to 2020. (On a side note, if we include Ginnie Mae securities–those that are backed by FHA mortgages–the federal share of the MBS market averaged 92 percent per year.)

So, the FHFA, a government agency, can unilaterally alter the fees–a component of the total price–that borrowers pay in most of the mortgage market. Americans should think about this situation when they get upset about home prices being so high. A housing finance system based on free enterprise would look nothing like the American system.

Regardless, the details demonstrate just how counterproductive these latest fee eliminations will be for America’s so-called affordable housing policy.

First, the changes will eliminate upfront fees for first-time homebuyers with average income in their geographic region. Aside from completely removing any pretense that the changes are helping low-income buyers, the term “first-time homebuyer” doesn’t really mean first-time homebuyer. This fee elimination provides a massive purchasing incentive.

Separately, Fannie’s HomeReady program “caters to lower-income homebuyers who don’t have a large down payment saved up.” To be eligible, “first-time” borrowers qualify if they earn no more than 80 percent of AMI, have a credit score of at least 620, and have a 3 percent down payment. (Buyers can, of course, obtain that 3 percent from grants or any number of down payment assistance programs). Freddie’s Home Possible loans have similar requirements, though they are also available to folks who have no credit score.

In case that’s not enough, Fannie and Freddie also have their HFA Advantage and HFA Preferred loan programs. These are special low down payment loan programs available only to eligible Housing Finance Agencies (HFAs). These HFAs, of course, are state government agencies, part of the state-federal system that’s been constructed to assist home buyers with everything from advice to grants. (According to the National Council of State Housing Agencies, the release of the 2021 State HFA Digital History Book marked a “half-century of state HFA collaboration, innovation, and impact.” Don’t worry about the ongoing affordability problem, HFA’s have a long history of innovation and impact.)

Last, both Fannie and Freddie have separate loan programs for single-family loans under their Duty to Serve programs. These programs are mainly focused on lower-income buyers in so-called underserved markets, including rural areas and manufactured housing.

So, on net, this latest round of fee changes doesn’t represent any kind of major policy shift. The United States still has a government-dominated housing finance system, one heavily geared toward making it easier to get loans with as little money down as possible.

Not only is this approach a dicey proposition for lenders and buyers, but it also pushes prices up. It’s sad, but highly likely that government officials will need at least another 50 years to learn these lessons.

As I’ve pointed out multiple times, all the typical American has to show for the existing housing finance system is excessive debt, high housing costs, volatile home prices, overregulation, and a trail of federal bailouts. The homeownership rate is almost exactly where it was prior to the expanded reliance on Fannie and Freddie; home price appreciation has consistently outpaced income growth, and taxpayers have been forced to shell out hundreds of billions of dollars in bailouts.

The administration can pretend that it’s doing something to make housing more affordable, but accomplishing that goal would mean moving away from the current system.