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FHFA Makes Decision on G-Fees

Incremental Changes Forthcoming

Stuart Quinn    |    Housing Policy

On April 17, 2015, the Federal Housing Finance Agency (FHFA), conservator of Fannie Mae and Freddie Mac, announced incremental changes to their guarantee fee adjustments (g-fees). The agency is removing the upfront adverse market conditions fee (AMDC) of 25 basis points (0.25 percent bps) that was imposed in 2008 to account for the unpredictability in the housing market at that time. The agency will also be adjusting targeted upfront loan-level-price-adjustment fees that are determined by the amount of risk as associated with product type, loan-to-value ratio and credit score. The effect of these changes on the single-family purchase loans with terms exceeding 15 years is illustrated in Figure One and Figure Two. A full list of the modifications made to different product grids such as investor purchase, higher priced loans and secondary financing are available on the respective government-sponsored enterprise (GSE) websites (Fannie | Freddie). The updated grid indicates a minor reduction to the fees paid by riskier borrowers on the lower end of the credit score spectrum. This same group has made up a relatively small part of the market in recent years (Figure 3). Though these changes are minor, they will reduce the financing terms for borrowers with weaker purchasing power and raise costs for investor purchases and higher balanced loans to offset the changes.

Post Loan Level Price Adjustments as Percent

Post Loan Level Price Adjustments as Percent

The average estimated single-family g-fee for purchase transactions has more than doubled from 2009 to 2013, growing from 22 bps to 55 bps (Figure 4). These fees are charged to lenders to cover GSE operational costs associated with guarantee of timely principal and interest payments, capital buffers and administrative costs. The charge is generally passed through to consumers and can come in two different forms: upfront and ongoing. However, lenders have the option to convert the upfront or delivery fee into an ongoing fee included in the borrower’s rate. For instance, the removal of the adverse market delivery charge has the potential to provide an upfront reduction of 25 basis points or a reduction of 5 basis points (or 0.05 percent) for an ongoing mortgage rate. According to FHFA, the binding constraint to more significant changes is the cost of modeled capital necessary to cushion against future adverse market conditions. Ironically, this is a capital cost that the GSEs do not keep, as the modified Senior Preferred Stock Agreement (PSPA) with Treasury does not allow for the enterprises to retain capital.

Percent of Purchase Originations: First Lien, Conventional (2014)

Percent of Purchase Originations: First Lien, Conventional (2014)

Overall, the removal of the adverse market conditions fee makes a lot of sense given the previous two years in home prices and forecasted home price appreciation of 6 percent and 5 percent respectively in 2015 and 2016. The change does not become effective until September 1, 2015, further limiting its impact due to the seasonality of the housing market. 

Average Estimated Single-Family G-fee

Average Estimated Single-Family G-fee

Additional Noteworthy Items:

  • The removal of the AMDC will be applied to all states. Under FHFA Director Mel Watt’s predecessor, the AMDC was scheduled to continue for states with lengthier foreclosure timelines (NY, NJ, CT, FL)
  • The report also assessed g-fee pricing of Freddie Mac credit risk transfer (STACR) transactions and found the existing fees to be appropriate
  • FHFA estimates that the majority of changes have appropriate offsets and will not cause any material changes to the GSE’s loan volumes or revenue

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