The FNMA ups its fees
Posted by markharrison on December 11, 2007
Those who invest in the States have probably come across an organisation called the “Federal National Mortgage Association (FNMA)” (pronounced “Fannie May” – try saying FNMA in an American accent, and you’ll get the idea.)
The FNMA is an odd beast – it was founded as a Government agency in the 1930s, but privatised 30 years later – and has been a private company since, well, before I was born. Despite this, many Americans still believe that it is backed by the US Government (which isn’t true), or at the very least, that the US Government would step in to stop it going under if it had real problems (which might be true, but not something anyone would want to put to the test, particularly with a Republican Government in power.)
What the FNMA does is related to Mortgage Securitisation (if you need a primer on what that it, you can read my article here.)
The FNMA is odd, and basically “takes the risk” on ‘mortgage securities’ (shares in companies whose business is owning mortgage debt.) In exchange for an up-front fee, the FNMA issues bonds, and guarantees to pay back the nominal value of the bond, plus interest at an agreed rate, whether the individual mortgage-payers pay up or not.
In fact, the FNMA, while seen as Government-backed is LESS regulated that many other financial companies – for instance, it can issue these bonds on the basis of having HALF the amount of capital available to repay them that a normal bank issuing such bonds would.
Where is does well is that it sets the maximum size of mortgage it will buy, so it makes it easier for mortgage companies to issue smaller mortgages (because they know they’ll be able to securitise them through the FNMA), thus helping Americans on lower incomes get onto the housing ladder.
Anyway, why I am blogging about them today?
Because, last week, the FNMA quietly added a .25% (quarter per cent) “arrangement fee” to new mortgages it buys or guarantees.
Which is to say, the FNMA, one of the biggest mortgage-related companies in the world, has suddenly less faith in whether most mortgages will be repaid. This is, to my mind, the US equivalent of the BaseRate/LIBOR divergence I wrote about two weeks ago.
Obviously, in the US, this arrangement fee is inevitably going to be passed on to borrowers, and remember that the FNMA-related borrowers are typically lower-income people trying to buy starter homes.
All this bodes well for the overseas investor trying to invest in the States – if nothing else, it’s made life harder for the domestic US competition.
That’s not to say that investing in the States is risk-free, far from it, just that the pendulum is, after many years of Americans investing in the rest of the world, swinging towards Europeans and Asians investing in the States.