Before the end of this year, Fannie Mae and Freddie Mac will raise guarantee fees (g-fees) on single-family mortgages by an average of 10 basis points.[IMAGE]
When the GSEs provide mortgage-backed securities (MBS), they guarantee the payment of principal and interest on the securities and charge a g-fee for the guarantee. The fee is used to cover potential credit losses in case a borrower defaults and for administrative costs.
On Friday, ""FHFA"":http://www.fhfa.gov, the GSEs' conservator, announced it has directed Fannie Mae and Freddie Mac to increase g-fees as a step toward encouraging more mortgage market participation from private firms.
""These changes will move Fannie Mae and Freddie Mac pricing closer to the level one might expect to see if mortgage credit risk was borne solely by private capital,"" said Edward J. DeMarco, Acting Director of FHFA, stated in a release.
The increases are scheduled to take effect on December 1 for loans exchanged for mortgage-backed securities. For loans sold for cash, the increases are scheduled for November 1, 2012.
In addition to making the announcement, FHFA released a ""report"":http://www.fhfa.gov/webfiles/24258/gfeestudy_2011_83112.pdf on single-family g-fees for 2010 and 2011, which found the GSEs, on average, increased g-fees by 26 basis points in 2010 and 28 basis points in 2011.
FHFA also noted the report revealed higher risk mortgages were generally subsidized by lower-risk loans, and most single-family mortgages bought by Fannie Mae or Freddie Mac came from a concentrated group of large lenders. According to the report, in 2010 and 2011, the top five lenders accounted for around 60 percent of the GSEs combined business volume compared to under 10 percent for lenders ranked below the top 100.
FHFA stated the issue will be addressed by having the g-fees charged to lenders who deliver large volumes of loans more ""uniform"" compared to those who deliver small volumes.
Cross-subsidies will be addressed by increasing g-fees on loans that take more than 15 years to mature. According to the report, 15-year fixed-rate loans have a history of lower credit losses.