FM Commentary

FM Commentary

Guaranty Fees – 101

Andrew Bon SalleUnderstanding the G-Fee

A guaranty fee, also referred to as a “g-fee,” is one of the costs reflected in the interest rate on a single-family mortgage loan. This fee represents the charge by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac to guarantee that an investor in that loan will receive all scheduled principal and interest payments until the loan is repaid. The guaranty fee is compensation for assuming all credit losses and costs associated with loans that become delinquent and ultimately go to foreclosure.

The g-fee is generally stated in basis points (bps); each basis point represents 1/100th of one percent of the loan amount. For example, a Fannie Mae guaranty fee of 29 basis points to guarantee a newly acquired single-family loan would represent 0.29 percentage points (0.29%) annually of the loan amount paid to Fannie Mae on a monthly basis. We set guaranty fees based on a variety of business and market factors. Since the guaranty fee is typically built into the interest rate charged to the borrower, an increase in g-fees may translate to an increase in interest rates.

Fannie Mae’s public mission is to help keep liquidity flowing to the mortgage market. Our activities include securitizing mortgage loans originated by lenders into Fannie Mae mortgage-backed securities (MBS) and then serving as trustee and guarantor of the MBS. These securities are generally considered to be very liquid; lenders can either hold MBS as an investment or sell the securities to investors in the secondary market to replenish their funds available to lend. Fannie Mae also retains some of the MBS it issues.

G-Fees and the Temporary Payroll Tax Cut Continuation Act of 2011

At the direction of the Federal Housing Finance Agency (FHFA), the GSEs will increase the guaranty fees charged to lenders by 10 basis points on loans delivered to us on or after April 1, with future increases also possible. The Temporary Payroll Tax Cut Continuation Act of 2011, which was signed into law in late December, mandates the fee increases on loans delivered to Fannie Mae, Freddie Mac, and FHA.

As mandated by Congress, the additional 10 bps fee will be remitted to the U.S. Treasury to help offset the cost of a two-month extension of the payroll tax cut. This is different than the historical role of the guaranty fee, which is to compensate Fannie Mae for the cost of providing a guaranty on mortgage loans. Fannie Mae provided information to lenders on this fee increase in a recent Selling Guide Announcement. Based on discussions with some lenders, the interest rate charged to borrowers may already reflect this mandated increase.

Borrowers with 30-year, fixed-rate mortgages near the current conforming loan limit of $417,000 can expect to pay more than $8,500 over the life of the loan to fund the 10 basis point fee. The FHFA, in consultation with the GSEs, will determine if future guaranty fee adjustments will be necessary to satisfy the requirements of the law. It is important to note that the current fee increase will affect only new loan originations. In most cases, the GSEs will charge lenders the higher fee only for loans that are securitized or sold to the GSEs on or after April 1, 2012. 

Fannie Mae will continue to work with FHFA to ensure that all statutory requirements are reflected in our 2012 pricing strategy.

Andrew Bon Salle
Senior Vice President
Underwriting & Pricing

February 16, 2012

The views expressed in these articles reflect the personal views of the authors, and do not necessarily reflect the views or policies of any other person, including Fannie Mae or its Conservator. Any figures or estimates included in an article are solely the responsibility of the author.

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