GSE single-family pricing framework changes should streamline capital requirements, HPC says

The Housing Policy Council (HPC) is urging the Federal Housing Finance Agency (FHFA) to modify its proposed government-sponsored enterprises (GSEs) single-family pricing framework, including coordination with banking regulators to streamline capital requirements and retention of upfront guarantee fees.

The original request for input published in May was designed to gather public feedback on goals and policy priorities the agency should pursue in its oversight of the pricing framework. FHFA also sought input on the GSEs’ single-family upfront guarantee fees and whether to continue linking those fees to the Enterprise Regulatory Capital Framework (ERCF).

HPC, in its comment letter, expressed support for the ERCF, suggesting the agency also require pricing levels that will let enterprises earn target rates of return over a reasonable period of time.

The Council also noted that the RFI did not address the financial benefits and operating advantages that Fannie Mae and Freddie Mac derive from their government-sponsored status.

The enterprises, said HPC, “are advantaged by a lower cost of debt financing and a lower cost of capital.” A borrower subsidy, HPC argues, is directly descended from such charter privileges enjoyed by the GSEs.

HPC also suggested that FHFA retain upfront guarantee fees, since it sees those fees as a critical post-financial crisis safety and soundness reform measure. FHFA, it noted, should continue to calibrate risk-based pricing to the ERCF. Meanwhile, the cross-subsidization model is not working as intended and actually contributed to GSEs’ failure in the run-up to the 2007-08 financial crisis, the Council said.

The ERCF, which was established in 2020, has a “significant impact on the risk-based pricing component of the enterprises’ guarantee fees,” the FHFA said in its May RFI. The FHFA began using the ERCF to measure the profitability of new mortgage acquisitions in 2022.

FHFA Director Sandra Thompson said the RFI was issued to increase transparency.

“FHFA seeks input on how to ensure the pricing framework adequately protects the enterprises and taxpayers against potential future losses, supports affordable, sustainable housing and first-time homebuyers, and fosters liquidity in the secondary mortgage market,” she said.