As part of the Strategic Plan for the conservatorships, FHFA announced another installment of increased Guarantee fees ("G-Fee") for Fannie Mae and Freddie Mac today. Given the time that has transpired since the last G-Fee hike (over a year) in conjunction with the agency's stated goals (and law!) of gradual increases, if anything about it's timing is surprising, it's that it did NOT come sooner.
(Read More: FHFA Considers Higher Mortgage Fees)
The changes take effect beginning on April 1st, 2014 for loans securitized as MBS and on March 1st 2014 for whole loans sold for cash. Vital details are broken down below--essentially all of which were both expected and well-telegraphed
(Read More: DeMarco: Guarantee Fees will Continue Gradual Rise).
Base (ongoing) G-Fee Changes and Considerations
- The base G-Fee for all mortgages will increase by 10bps or 0.1%.
- This 10bps is directly equates to 0.1% in rate, but is also 0.1% of the remaining principal balance, paid monthly.
- It does not appear as an additional charge on rate sheets or consumer quotes.
- The base G-Fee increase simply makes interest rates about 0.1% higher for consumers.
- The current base G-Fee average is just over 50bps, up from 20-25bps historically. This includes both the ongoing and the up-front G-Fee (LLPAs)
- Ongoing G-Fee discrepancies between lenders have progressively narrowed and are expected to continue narrowing with each G-Fee hike.
- The last time the G-Fee was raised by 10bps across the board, it equated to a 30-50bp increase in price/costs and a .125-.25% increase in rates. (Read More: Tax Cut Extension Now Officially Raising Mortgage Rates)
- The law mentioned above is as follows:
- 12 USC § 4547 (B) The amount of the increase required under this section shall be determined by the Director to appropriately reflect the risk of loss, as well  the cost of capital allocated to similar assets held by other fully private regulated financial institutions, but such amount shall be not less than an average increase of 10 basis points for each origination year or book year above the average fees imposed in 2011 for such guarantees. The Director shall prohibit an enterprise from offsetting the cost of the fee to mortgage originators, borrowers, and investors by decreasing other charges, fees, or premiums, or in any other manner.
Changes in Risk-Based G-Fee Pricing
- Up-front G-Fees (LLPAs) will be updated to better align with risk
- Naturally, Loan-Level Price Adjustments (LLPAs) allow for G-fee variation at the "loan level," whereas ongoing G-Fees only vary by product type and lender.
- G-fee values haven't been commensurate with their risk. This has been discussed previously by the FHFA and OIG and is referred to as "cross subsidization"
- Read More about Cross Subsidization
- The FHFA has already taken steps to reign in cross-subsidization in previous g-fee hikes and upfront LLPA grid changes
Changes in Adverse Market Fee For All but 4 States
- The 25 bp adverse market fee is going away!
- The 25bp adverse market fee is NOT going away for New York, Florida, New Jersey and Connecticut
- This is NOT a new concept: Five States Targeted for Additional G-Fee Increases