Fannie Mae raises fees again to mitigate losses
NEW YORK (Reuters) - Fannie Mae is raising some fees on mortgage loans its purchases, marking the fourth increase in nearly a year, to reflect higher credit risk and offset losses from continuing market deterioration.
The steady rise in fees has modestly boosted home loan rates during the worst housing crisis since the Great Depression, some analysts say.
Fannie Mae FNM.N and its smaller counterpart, Freddie Mac <FRE.N, have been increasing fees to better reflect the risks caused by slumping home prices and mounting defaults and foreclosures.
The so-called Adverse Market Delivery Charge on all mortgages Fannie Mae buys from lenders and loans it packages into securities will double starting October 1, the largest U.S. home funding company said late Monday on its Web site.
The charge will rise to 0.50 percentage point from 0.25 point.
Matthew Seltzer, analyst at Barclays Capital, said Fannie Mae has indicated over the past year that its rising fees have aimed at maintaining capital as losses and expectations of losses mounted.
"The flip side is that these fees have a cost," he said.
"Originators are the ones that have to pay these up-front fees, and the originators need to be compensated. They most likely will turn around to the borrowers and factor those higher fees into higher mortgage rates," Seltzer said. "What's the effect? All else being equal, it has the effect of pushing mortgage rates higher, which is not exactly conducive to generating new business."
The Adverse Market Delivery Charge, which relates directly to deteriorating market conditions, was introduced by Fannie Mae in December 2007 and is being raised for the first time.
Another set of fees, known as Loan Level Price Adjustments, or LLPAs, is also being tweaked, with some rising and others declining starting October 1. These fees are based on certain risk characteristics, such as mortgage loan-to-value and credit scores.
The LLPA was increased in November 2007 and again in March, with the October increases on some loans marking the third in less than a year.
"The Adverse Market Delivery Charge increase addresses continuing market deterioration and the updated Loan Level Price Adjustments reflect our continual monitoring and ongoing efforts to fine-tune the alignment of price with risk," Marilyn Kornfeld, a Fannie Mae spokeswoman, said on Tuesday.
"Fannie Mae is announcing these changes to better align pricing with credit risks, mitigate losses and support Fannie Mae's ability to provide a stable source of liquidity to lender partners."
The company is set to release its second-quarter earnings on Friday, giving the market a better sense of the results of its risk-based pricing efforts.
Regarding the fee decrease for certain loans -- with credit scores of at least 620 and LTV ratios over 85 percent -- Fannie Mae contends this may stimulate housing for borrowers with modest down payments and support its lenders in a difficult housing market.
With some of Fannie Mae's fees being reduced, the net effect is modest, Barclays' Seltzer said, as most of the previous increases in fees have already been priced into current mortgage rates.
The fees due to be implemented on Oct 1 could cause borrowers the equivalent of an additional 0.06 to 0.20 percentage point in higher mortgage rates, he estimated.
(Editing by Dan Grebler)
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