By Yali N’Diaye

WASHINGTON (MNI) – With no clear direction in sight for the future
of Fannie Mae and Freddie Mac, their current regulator further clarified
its expectations for the two mortgage giants in the short term,
suggesting they won’t emerge from conservatorship anytime soon.

In particular, Federal Housing Finance Agency Acting Director
Edward DeMarco said Monday that a gradual increase in the
government-sponsored enterprises’ guarantee fees should be expected from
next year to better reflect what private market conditions would be.

He said later in an interview with CNBC that he did not consider
fees to be the main barriers to borrowers’ access to the government’s
Home Affordable Refinancing Program.

“I don’t believe that fees, and certainly fees alone, in the
current refinance program is the key barrier,” he said.

Such comments come after DeMarco announced earlier this month that
his agency was “carefully reviewing the mechanics of the HARP program to
identify possible enhancements that would reduce barriers for borrowers
already otherwise eligible to refinance using HARP.”

That sparked some analysts to include lower guarantee fees in the
possible adjustments to the HARP program. In fact, Department of Housing
and Urban Development Shaun Donovan has even said fees “stand in the way
for a consumer.”

In Monday’s speech to the American Mortgage Conference in Raleigh,
North Carolina, DeMarco said “After three years, there still is no clear
direction as to what legal and institutional structures will replace the
Enterprises and their central position in the housing finance market.”

And without such direction, “as the length of the conservatorships
extend, real risks exist beyond the normal business risks associated
with guaranteeing new mortgages,” he continued.

He said while no one anticipated the GSE reform to be an easy task,
“the general expectation was that more progress would have been made by
now.”

However, “It ought to be clear to everyone at this point, given the
Enterprises’ losses since being placed into conservatorship and the
terms of the Treasurys financial support agreements, that the
Enterprises will not be able to earn their way back to a condition that
allows them to emerge from conservatorship.”

Against this backdrop, the FHFA is left to clarify its expectations
for the activities and business of the two mortgage giants, with the
goal of continuing to build up private market discipline and reduce
risk.

DeMarco first pointed out that while capital requirements do not
apply to Fannie Mae and Freddie Mac in exchange for being able to
request funds from the Treasury Department, returning the GSEs to a
healthier financial state requires to give further consideration “to
pricing and to other forms of risk sharing.”

That should translate into further increases in the guarantee fee,
albeit at a “gradual” pace with “periodic” increases so as to not
undermine efforts to stabilize the housing market.

“In providing a peek ahead, I would anticipate the Enterprises will
continue the gradual process of increasing guarantee fees,” DeMarco
said. “This will not happen immediately but should be expected in 2012,
with some prior announcement as is typically done by each company.”

The price increase would not be uniform across the board, he said,
and guarantee fees would take different factors into account such as
geographical differences across the country that create differences in
risk.

FHFA will also be considering alternatives such as expanding the
use of mortgage insurance and securities structures that allow for
private sector risk sharing.

DeMarco supports the development of “security structures that allow
for a portion of the credit risk currently undertaken by the Enterprises
to be sold off.”

He said, “There are numerous securities structures that could be
considered in this space, and we will be evaluating some of those in the
coming months.”

FTN Financial analyst Jim Vogel commented in a note Monday that
“Between the White House deficit proposal and a speech by FHFA’s
director, it appears talk of using the GSEs to stimulate housing is not
moving forward for now.”

“Instead,” he continued, “both discussed raising fees to reduce
taxpayer costs and reduce subsidies to housing.”

In his ‘Plan for Economic Growth and Deficit Reduction’ sent to
Congress Monday, President Obama indeed proposed higher fees, starting
“with a modest increase of 10 basis points, or one-tenth of one percent,
to Fannie Mae and Freddie Macs existing fees.”

The White House said existing mortgages would not be affected. It
added in its report titled “Living Within Our Means And Investing In The
Future,” that “these small changes would reduce costs to the Government
by $28 billion over 10 years.”

** Market News International Washington Bureau: 202-371-2121 **

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