Under the Housing and Economic Recovery Act of 2008 (HERA) requirements, the Federal Housing Finance Agency (FHFA) is obligated to submit an annual report to Congress concerning Fannie Mae’s and Freddie Mac’s guarantee fees. The report titled “Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2014” is an analysis of the GSEs of fees by product type, risk class, and the volume of a lender’s business. The report also reviews the costs of providing the guarantee in comparison to the prior year.
According to the FHFA report, the average level of guarantee fees charged has increased since 2009, when the report began. The guarantee fees are now two-and-a-half times their previous level from 2009 to 2014. The average fees increased from 22 basis points to 58 basis points from 2009 to 2014. From 2013 to 2014, average fees increased from 51 basis points to 58 basis points.
The report also noted that gaps on 30-year fixed rate loans were more negative and gaps on 15-year loans were more positive in 2014 than in 2013. This is mostly because of changes in the models the Enterprises use to estimate the capital necessary to support their mortgage guarantee business. The gap on 30-year fixed rate loans was negative in relation to targeted return on capital, the returns on capital were positive.
The percentage of loans that the Enterprises purchased from small lenders increased significantly in 2014, while pricing differences between small sellers and large sellers remained small, the report said.
The Agency also said that Fannie Mae and Freddie Mac acquire single-family loans from lenders and securitize them in the form of mortgage-backed securities (MBS). Even though the GSEs have some MBS on their balance sheets, most are held by private investors. The GSEs guarantee an on-time payment of principal and interest for investor-held MBS. In exchange for providing this guarantee, the GSEs charge lenders guarantee fees.
“Although the Enterprises are always the ultimate guarantors, they may choose to retain the credit risk on their own balance sheets or, as part of their credit risk-transfer programs, pay private entities to bear some of the credit risk,” the FHFA said.
There are three types of costs that the Enterprises expect to incur by providing their guarantee, the report says. First, the cost of borrowers not making their payments. Second, the costs of holding economic capital to protect against potentially much larger, unexpected losses as a result of failure of borrowers to make their payments. Third, general and administrative expenses.
The FHFA also revealed that there are two types of guarantee fees: ongoing and upfront. Ongoing fees are collected each month over the life of a loan, while upfront fees are one-time payments made by lenders when a loan is acquired by an Enterprise.
“Fannie Mae refers to upfront fees as loan level pricing adjustments, and Freddie Mac refers to them as delivery fees,” the report said. “Both ongoing and upfront fees compensate the Enterprises for providing credit guarantees. To date, the Enterprises have relied primarily on upfront fees to reflect differences in risk across loans as opposed to ongoing fees.”
Recent improvements in the housing market, the FHFA has decided to removed the 25 basis point upfront Adverse Market Charge instituted in 2008 for all states effective with September 2015 loan deliveries. They plan to replace this revenue by making targeted increases to a subset of loans, including some higher risk loan segments and those with both high credit scores and low loan-to-value (LTV) ratios.
"In April 2015, FHFA completed a comprehensive review of the agency's policy for guarantee fees charged by the Enterprises to lenders,” the FHFA said. “FHFA decided not to change the general level of fees. However, FHFA made certain minor and targeted fee adjustments. Overall, the set of modest changes to guarantee fees is roughly revenue neutral and will result in little or no change for most borrowers.”
Main risk characteristics that determine the estimated cost of guaranteeing a single-family mortgage:
- Borrower credit history
- Debt-to-income ratio
- Loan-to-value (LTV) ratio
- Mortgage insurance coverage
- Loan purpose (purchase, rate-term refinance, cash-out refinance)
- Occupancy status (primary home, investor)
- Property type (single-family, condominium, 2-4 unit, manufactured housing)
- Product type (fixed, adjustable rate, maturity term)
- Mortgage interest rate