“Realtors supports FHFA Decision to Delay Fannie, Freddie Fee Increases” – so what is a G-Fee anyway?
Last week Mel Watt, the new Director
for the Federal Housing Finance Agency (FHFA), has announced that he is
delaying the increases in guarantee fees (g-fees) on loans purchased by Fannie
Mae and Freddie Mac. He said he intended "to conduct a thorough evaluation"
of an increase in fees the firms charge lenders to guarantee mortgages. Those
increases, which would make mortgages more expensive, were set to take effect
in March and April. The delayed increase is good news for mortgage rates, but
it is also tempered by the other part of the original announcement that would
have eliminated the up-front 25 basis point adverse market fee that has been
assessed on all mortgages purchased by Fannie Mae and Freddie Mac since 2008.
Though this is getting much less press, the fee will remain in place through
Watt’s evaluation.
So what is a g-fee?
The guarantee fee is the fee charged by Fannie Mae and Freddie Mac to lenders for bundling, servicing, selling and reporting mortgage-backed securities (MBS) to investors. It is charged to protect against credit-related losses in the mortgage portfolio, and is basically there for the agency to make a profit. It’s important to note that while the fee is charged to the lender, ultimately the lender has to pass the increased costs along to the consumer. So what does a .10% fee increase mean to the consumer? Well, a rate of 4.5% now becomes about 4.625%. If the consumer wants to get back to that 4.5% rate, they will have to pay the fee in pricing, which is an average of about .5% of the loan amount. That means on a $200,000 loan, the borrower will pay an extra $1,000 to get that same rate after the g-fee increase.
The guarantee fee is the fee charged by Fannie Mae and Freddie Mac to lenders for bundling, servicing, selling and reporting mortgage-backed securities (MBS) to investors. It is charged to protect against credit-related losses in the mortgage portfolio, and is basically there for the agency to make a profit. It’s important to note that while the fee is charged to the lender, ultimately the lender has to pass the increased costs along to the consumer. So what does a .10% fee increase mean to the consumer? Well, a rate of 4.5% now becomes about 4.625%. If the consumer wants to get back to that 4.5% rate, they will have to pay the fee in pricing, which is an average of about .5% of the loan amount. That means on a $200,000 loan, the borrower will pay an extra $1,000 to get that same rate after the g-fee increase.
Why raise the g-fee?
Now that the agencies are under government conservatorship, the government has shown that they have no problem using the g-fees as a form of creating revenue – which they did in 2012 when g-fees were increased to pay for the payroll tax cut. Another reason given by government on raising the g-fee is to make it more attractive for more private funds to enter back into the mortgage-backed securitization business (higher fees equals higher profits).
Now that the agencies are under government conservatorship, the government has shown that they have no problem using the g-fees as a form of creating revenue – which they did in 2012 when g-fees were increased to pay for the payroll tax cut. Another reason given by government on raising the g-fee is to make it more attractive for more private funds to enter back into the mortgage-backed securitization business (higher fees equals higher profits).
What about that adverse market fee?
Well, that is still in place for now too, and remember that it was 25 basis points. That means we were going to eliminate a 25 basis point fee (everywhere except NY, NJ, FL, and CT) and add a 10 basis point fee, for a net BENEFIT of -15 basis points. Even though everyone has talked about rates going up with the g-fee increase, we really should have seen rates go down slightly because of this action (again, except for NY, NJ, FL, and CT where the adverse market fee was yet to remain). So – even though everyone is cheering, was it really a win?
Well, that is still in place for now too, and remember that it was 25 basis points. That means we were going to eliminate a 25 basis point fee (everywhere except NY, NJ, FL, and CT) and add a 10 basis point fee, for a net BENEFIT of -15 basis points. Even though everyone has talked about rates going up with the g-fee increase, we really should have seen rates go down slightly because of this action (again, except for NY, NJ, FL, and CT where the adverse market fee was yet to remain). So – even though everyone is cheering, was it really a win?
What happens now?
Directly from the FHA news release: FHFA Director Melvin L. Watt, who was sworn in as Director on January 6, said that he intends to conduct a thorough evaluation of the proposed changes and their likely impact as expeditiously as possible, and would give not less than 120 days’ notice after completing the evaluation before implementing any changes. “The implications for mortgage credit availability and how these changes might interact with the new qualified mortgage standards could be significant,” said Watt. “I want to fully understand these implications before deciding whether to move forward with any adjustments to g-fee pricing.”
Directly from the FHA news release: FHFA Director Melvin L. Watt, who was sworn in as Director on January 6, said that he intends to conduct a thorough evaluation of the proposed changes and their likely impact as expeditiously as possible, and would give not less than 120 days’ notice after completing the evaluation before implementing any changes. “The implications for mortgage credit availability and how these changes might interact with the new qualified mortgage standards could be significant,” said Watt. “I want to fully understand these implications before deciding whether to move forward with any adjustments to g-fee pricing.”
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