July 2, 2015
The Importance of Understanding G-Fees
The Federal Housing Finance Agency has released Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2014. Ok, ok, this is some really technical stuff. But it gives us a lot of important information about what goes into the cost of a home mortgage.
The executive summary opens, “The Housing and Economic Recovery Act of 2008 (HERA) requires the Federal Housing Finance Agency (FHFA) to submit reports to Congress annually on the guarantee fees charged by Fannie Mae and Freddie Mac (the Enterprises).” (2, footnotes omitted) The report finds that “the average level of guarantee fees charged has increased since 2009. The guarantee fees are currently two-and-a-half times their previous level; from 2009 to 2014, average fees increased from 22 basis points to 58 basis points. From 2013 to 2014, average fees increased from 51 basis points to 58 basis points.” (2, footnote omitted)
For all of you non-experts out there, a basis point is 1/100th of a percentage point. So a guarantee fee (or g-fee in the lingo) of 58 basis points increases the interest rate paid by more than half a percentage point (for instance, from 4.5% to 5.08%). So homeowners should want to understand why g-fees have more than doubled since 2009.
The report breaks down how g-fees gradually increased in response to Congressional and FHFA requirements, some of which are not tied to housing finance goals at all. For instance, Congress added ten basis points to fund an extension of a tax cut.
Many have argued that g-fees should be kept as low as possible in order to help out the housing market. I do not take that position, in large part because cheap credit does not necessarily lower the cost of housing; sellers may just be able to raise the price of their homes in a cheap credit environment. I also believe that the housing market and the mortgage market need to achieve some sort of equilibrium and unnaturally low g-fees will distort such an equilibrium.
The price of the g-fee should reflect the real costs of the g-fee. For instance, it should cover the cost of losses that result from borrower default. It should not be used to fund programs unrelated to housing. G-fees that are unnaturally high distort the housing finance market and make homeowners subsidize other constituencies. Federal housing finance policy tends to get screwed up if it veers too much from its fundamentals, so we should not ask too much of the g-fee.
Fannie and Freddie have been in limbo ever since they entered conservatorship in 2008. The longer they are in that limbo, the more likely it is that Congress will use them to do all sorts of things that do not relate to maintaining a liquid housing finance market. This study outlines how the g-fee has morphed over time and is a wake-up call to homeowners and policy makers alike to set Fannie and Freddie on a healthy course for the long term, starting with that obscure and technical g-fee.
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