Last Friday, the FHFA announced they’re increasing the “guarantee fee” (aka “g-fee”) by an average of additional 0.10 basis points on single family mortgages. What is a guarantee fee? From the FHFA annual report:
Fannie Mae and Freddie Mac acquire single-family mortgages from mortgage companies, commercial banks, credit unions, and other financial institutions. Lenders may exchange loans for mortgage-backed securities (MBS) backed by those mortgages or sell whole loans for cash proceeds.
When lenders receive MBS in exchange for their loans, they may hold them as an investment or sell them in the capital markets. The Enterprises also issue MBS backed by pools of loans acquired from multiple lenders.
Each Enterprise [Fannie Mae or Freddie Mac] guarantees the payment of principal and interest on its MBS and charges a fee for providing that guarantee. The guarantee fee covers projected credit losses from borrower defaults over the life of the loans, administrative costs, float income (or expense), and a return on capital.
From Housing Wire:
Lenders paid an average 28 basis points in 2011 for Fannie and Freddie to guarantee their loans in the bonds issued to investors, up from 26 bps the year before, according to a report released by the FHFA Friday.
The GSEs raised their fees by 10 basis points in April in order to pay for a tax cut passed by Congress in December. But before the enactment, the FHFA pledged to raise the fees through 2012 in order to allow private issuers room to compete.
Do not expect banks or lenders to absorb this cost. The 0.10% increase in basis points will be passed on to consumers and factored into the pricing of mortgage interest rates. This is set to happen towards the end of this year, however I wouldn’t be surprised to see lenders factoring in the fee increase much earlier.
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