ABA Letter to FHFA on Single-Family Pricing Framework

The Honorable Sandra Thompson
Director
Federal Housing Finance Agency
Washington, DC 20219

Dear Director Thompson:

The American Bankers Association (ABA) is pleased to offer comments on the Federal Housing Finance Agency's (FHFA) Request for Input (RFI) regarding Fannie Mae and Freddie Mac's single-family pricing framework. Through this RFI, the FHFA solicits comment on the goals and policy priorities that FHFA should pursue in its oversight of the pricing framework for the government-sponsored enterprises (GSEs or Enterprises). Importantly, FHFA also seeks input on the process for setting the GSEs' single-family upfront guarantee fees.

A critical principle underlying our comments is that adjustments to guarantee fees charged by the Enterprises must be aligned with credit risk. ABA does not offer recommendations on precise fee levels or methods for apportioning the fees (i.e., whether they are upfront or on-going fees). We do, however, caution that guarantee fees–the key revenue component for GSE income–must not be subject to manipulation that misaligns pricing and risk in order to achieve other ends beyond guaranteeing timely payment of principal and interest on mortgage-backed securities that GSEs issue. Therefore, we urge adherence to statutory directives intended to ensure that the GSEs operate in safe and sound manner with adequate capital and risk controls.

Within this prudential setting, we focus our comments on certain elements outlined in the RFI. Our members note that a priority element impacting depository institution participation in GSE programs relates to the "process" of setting of single-family guarantee fees. The RFI solicits input on the frequency that FHFA should update the upfront guarantee fees. On this point, although we agree that the issue of timing is very important, we also urge the agency to go beyond timing to also incorporate additional process safeguards that will clarify and solidify pricing decisions going forward.

A. FHFA should adopt a process that requires agency review of fees every three years.

We believe that requiring a review of the guarantee fees every three years would establish an appropriate interval for price adjustments (if needed) to respond to market fluctuations in a timely manner. A mandatory three-year review cycle would avoid decisional delays by the agency and stagnation of important pricing considerations that require evergreen data in the analysis of housing and economic cycles.

Our recommendation for a three-year review cycle would promote certainty in operations, as stakeholders would always have advance knowledge of scheduled changes, which would facilitate forward planning to prepare for price adjustments. Similarly, precise time intervals would facilitate efficiencies in FHFA and GSE operations, as both entities could anticipate and plan for staffing and other adjustments necessary for reviews.

We note that this temporal discipline for price reviews would also enhance the safety and soundness of the system as a whole. ABA believes in protecting the integrity of the mortgage system, and believes that GSE pricing decisions must be free of political pressures that can cause policymakers to overlook current and future welfare of homeowners and borrowers. Establishing regularly scheduled reviews would reduce the potential for political motivations in pricing determinations. Policymakers would have to make decisions within defined timeframes rather than political convenience. A three-year review cycle would not coincide with presidential election cycles, further protecting pricing decisions from political considerations.

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