FHFA to Adjust Guarantee Fees

By Stevie Duffin Updated on 9/21/2012

In an attempt to reclaim a measure of the "exceptionally high costs" the GSEs have warranted  in mortgage default  cases, the Federal Housing Finance Agency is adjusting the guarantee fees charged by Fannie Mae and Freddy Mac. The FHFA is specifically targeting five states: Connecticut, Florida, Illinois, New Jersey and New York. 

According to the FHFA, the average carrying costs that these five states incur "significantly exceed" the nation's average. Consequently, these states lay the largest cost upon not only the GSEs (Government Sponsored Enterprises) but taxpayers as well. 

In these areas of the country mortgages would be charged an upfront fee of anywhere between 15 and 30 basis points. The fees would then be levied to lenders in the form of an upfront one-time payment on each loan obtained by either Fannie or Freddie post execution. 

For homeowners in these five states the FHFA's intended strategy could potentially mean an increase in their monthly payment of $3.50 to $7 on a fixed-rate, 30-year mortgage of $200,000. 

When GSEs own or insure mortgages they are incurring credit risk. In order to neutralize this risk, they charge guarantee fees or g-fees. The amount charged for single-family homes varies, depending on the type of loan and variations in credit risk either on the part of the lender or the part of the borrower.

The FHFA reports a broad range of difference between states in terms of mortgage defaults and the cost they gain for Fannie and Freddie, according to an official letter submitted to the Federal Register and signed by Edward DeMarco, acting director of the FHFA. The letter reports that this is caused largely by variations among states in the procedures required for lenders and investors to handle a default, to obtain foreclosure, and to acquire the title to the property backing a single-family mortgage in a marketable fashion.

Due to judicial or regulatory actions, foreclosure takes longer in some states, and in certain cases there is a period following foreclosure in which an investor must wait to market the foreclosed property.  Another variation among states described by the FHFA letter involves the per-day carrying costs gained by investors during a period of time when the defaulted loan in question is non-performing and the time in which a foreclosed property is not permitted to be promoted on the market.

The FHFA writes that “those variations in time periods and per-day carrying costs interact to contribute to state-level differences in the average total carrying cost to investors of addressing a loan default,”

The agency adds “because the enterprises currently set their g-fees nationally, accounting for expected default costs only in the aggregate, borrowers in states with lower default-related carrying costs are effectively subsidizing borrowers in states with higher costs.”

The targeted guarantee fee adjustment is designed to address this issue.