There was a time when a mortgage banker could negotiate a master commitment with FNMA and have a very good idea where their loan products would be priced for the next year.  The guarantee fee was locked in and delivery fees rarely changed.  Most often these fees were directly tied to expansions of product guidelines clearly benefiting the mortgage bankers.

      No more.   First both agencies created “adverse market fees” of 25 basis points across the board, effectively retroactively repricing every single existing negotiated commitment.  So much for having a “commitment”.   In March, FNMA went a lot further by announcing sweeping risk-based pricing grids, again implemented on top of existing Master commitments.

      MIAC calculated the effect of these two fee changes on a typical mid-size lender, and found the impact to be approximately 89 basis points in price. At a 3.5 multiple, this is equivalent to an increase of approximately 25 basis points in guarantee fee, roughly a 150% increase in guarantee fee.

      We are also hearing complains from some lenders that the new pricing structure has introduced new complications to the process, from pricing to mark-to-market to best execution to accounting. 

      Clearly both FNMA and FHLMC are being forced to deal with the effects of the protracted decline in the real estate markets and skyrocketing foreclosure rates.  Given historical loss experience and in combination with “adverse market fees”  this new risk-based pricing is very, very favorable to FNMA.  An extra 50 bps for a 61% LTV, 719 FICO full-doc borrower?  That’s “high risk”?  COmbined with the 25 basis point adverse market fee, this results in an overall guarantee fee to FNMA of 35-40 basis points. That's pretty steep considering the same loan would have gone into a typical master commitment at a price of 16 basis points or less just last year.   

      Over time, we can expect competitive pressures between the two agencies to result in more competitive pricing.  This will not likely occur until the current crisis is well behind us.  As the foreclosure landscape gets uglier over the next year, we could actually see pricing temporarily get worse.

      So what can lenders do about to best position their firms to take advantage of this situation?  Since FNMA and FHLMC set market rates for conventional loans, we’re more or less stuck with it.  All lenders can do is be prepared to react, and react quickly, to protect themselves as price changes are announced, and to be prepared to find and take advantage of any best execution opportunities that may emerge.