| Fannie, Freddie Sued Over G-Fees
Connecticut, Wisconsin homeowners file suit over guarantee fees January 9, 2005 By PATRICK CROWLEY |
| Fannie Mae and Freddie Mac, already smarting from accounting scandals and management shakeups, are now taking heat for charging homeowners fees that are buried inside mortgage payments.The so-called “g-fees,” or guarantee fees, earned the Government Sponsored Enterprises more than $4 billion last year but are drawing scrutiny through lawsuits, Congressional inquiries and the media.
Homeowners in two states — Connecticut and Wisconsin — have filed class action lawsuits in U.S. District Court for the District of Columbia that accuses Fannie and Freddie of violating antitrust laws by conspiring to charge the excessive fees. The fees are charged to lenders as a financial cushion. If homeowners don’t make their monthly payments on time, Fannie and Freddie will cover the payments with money generated by the fees. But the lawsuits allege that the fees — which can reportedly total more than $11,000 over the life of a 30-year, $250,000 mortgage — are excessive because instead of rising and falling with actual losses from delinquent mortgages, they have risen in “lockstep,” a method that is an alleged violation of antitrust laws but a cash cow for the companies. The lawsuits also accuse Fannie and Freddie of conspiring in private to establish the fee structure and get lenders to sign off on the program. The companies have denied the allegations, according to the lawsuits. The suits were filed after The Wall Street Journal published a story on Jan. 24 that detailed the fee structure. Neither Fannie nor Freddie could be reached to comment for this article. But in an interview with Dow Jones, which owns the Journal, Freddie Mac spokeswoman Sharon McHale reportedly said the companies don’t consult each other on g-fees “much less enter into agreements.” “The case appears to be a misguided attempt to allege an antitrust complaint by cutting and pasting together a series of vague and misleading comments that appeared in a newspaper article,” McHale reportedly told Dow Jones. An analysis by GSE regulator Office of Federal Housing Enterprise Oversight that was reviewed by MortgageDaily.com indicates that in 1994 Fannie set its g-fees at four times its credit losses, while Freddie was at three times the losses. But by 2003, those numbers were 20.2 for Fannie and 23 for Freddie, according to the analysis, which OFHEO provided to Rep. Howard Baker, R-Louisiana, chairman of the congressional subcommittee that oversees the GSEs. The analysis is posted on Baker’s congressional Web site. “The adequacy of guarantee fees charged by Fannie Mae and Freddie Mac to cover expected costs and protect against risks associated with their guaranteed mortgage securities is an essential element of their risk management,” OFHEO Director Armando Falcon wrote in a letter to Baker. “Their average fee rates appear to be more than sufficient for that purpose and have contributed to their generally high returns on equity,” Falcon said. Falcon promised Baker that OFHEO is taking a larger look at the fees. “We believe it is worth pursuing,” Falcon said. |
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Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: pcrowley@enquirer.com |
