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Nitty Gritty Details on GSE's Expected Fee Hike and State-Level Changes

by devteam December 10th, 2013 | Share

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.</p

(Read More: FHFA Considers Higher Mortgage Fees)</p

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 </p

(Read More: DeMarco: Guarantee Fees will Continue Gradual Rise).</p


Base  (ongoing) G-Fee Changes and Considerations</p<ul

  • The base G-Fee for all mortgages will increase by 10bps or 0.1%.  </li
  • The base G-Fee does not appear as an additional charge on rate sheets or consumer quotes and comes out of every payment for the life of the loan.
    </li
  • The base G-Fee increase simply makes interest rates higher without explaining (to the consumer) why.</li
  • The current base G-Fee average is around 50bps, up from 20-25bps historically
    </li
  • Actual G-Fees per loan can be on either side of the average depending on loan characteristics</li
  • 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)</li
  • The law mentioned above is as follows: rn<ul
  • 12 USC § 4547 (B) The amount of the increase required under this sectionrn shall be determined by the Director to appropriately reflect the risk of loss, as well  [1] 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 forrn each origination year or book year above the average fees imposed in 2011 for such guarantees. The Director shall prohibit an enterprise fromrn offsetting the cost of the fee to mortgage originators, borrowers, and investors by decreasing other charges, fees, or premiums, or in any other manner. </li</ul</li</ul


    Changes in Risk-Based G-Fee Pricing
    </p<ul

  • Up-front G-Fee will be updated to better align with risk</li
  • 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”</li
  • Read More about Cross Subsidization</li
  • The FHFA has already taken steps to reign in cross-subsidization in previous g-fee hikes and even in changing the upfront “grids”
    </li
  • Fannie and Freddie publish “grids” at more frequent intervals than G-fees are changed.</li
  • These grids dictate how much a GSE will pay for loans with a higher rate than the intended MBS coupon and how much they will charge for loans with a lower rate than the intended MBS coupon*</li
  • The implication is that it will be increasingly expensive to buydown the G-fee on higher risk loans (or to have the GSEs buy-up excess interest).</li</ul

    Changes in Adverse Market Fee For All but 4 States</p<ul

  • The 25 bp adverse market fee is going away! 
    </li
  • The 25bp adverse market fee is NOT going away for New York, Florida, New Jersey and Connecticut </li
  • This is NOT a new concept: Five States Targeted for Additional G-Fee Increases</li</ul

    *In other words, assuming G-fee comes out to 0.5% and servicing to .25%, and assuming a loan at a note rate of 4.5%, we have

    4.5 – .5 – .25 = 3.75%

    3.75% is the amount of monthly coupon “clip” that would be passed through to the MBS investor, but 3.75% can’t be securitized (because MBS coupons are in 0.5 increments), so we either have to move down to 3.5% or up to 4.0%.  Fannie/Freddie grids are like the the rate sheets for determining the price to do either of those things.</p

    If you go to 3.5% in this scenario, Fannie/Freddie “buys up” your excess .25% (referred to as “strip”)</p

    If you go to 4.0% in this scenario, you have to buydown the G-fee deficiency because if you’re collecting 4.0% on what was supposed to have been 3.75%, Fannie and Freddie are missing out on .25% in interest that would otherwise be going toward their G-fee. 

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    • About the Author

    devteam

    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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