The Federal Housing Finance Agency (FHFA) has again increased the guarantee fee they charge to lenders delivering loans to Fannie Mae and Freddie Mac. This is important to know, as this increase has a rippling effect that will impact the cost of mortgage financing.
Here’s what’s happening and what it means to home loan rates:
What exactly is this “g-fee”?
The guarantee fee or “g-fee” is an amount charged by mortgage-backed securities (MBS) providers, like Freddie Mac and Fannie Mae, to help protect against credit-related losses in the overall mortgage portfolio. In other words, it acts a lot like insurance and helps lower the overall risk…which means home loans can be offered at terrific interest rates to borrowers that have good – but not perfect – credit.
What exactly is the impact of the rate increase?
The increase will impact loans with different amortizations in different ways. For example, for a $200,000 home loan, the increased g-fee (assuming a .125% increase in rate) would equate to $250 more per year in interest, or $7,500 more over 30 years. Someone buying or refinancing a home can certainly choose to buy down the cost with cash up front – but most folks will not do this.
Why is the guarantee fee being increased?
FHFA has increased the guarantee fee to collect more revenue to enhance the safety and soundness of the Government Sponsored Enterprises (GSEs), and perhaps indirectly encourage private firms to participate in the mortgage market.
Who will this impact?
The change will impact all new borrowers using Fannie Mae and Freddie Mac loans.
When will it start?
Officially, the increase to guarantee fees will begin on December 1, 2012. However, Fannie Mae will also be making adjustments to pricing for those loans that are committed on or after November 1, 2012. It’s important to note that the increase is already being seen in rate sheets right now, since home loans being originated now will likely not be closed, pooled and securitized until December and therefore will need the increased g-fee priced in earlier.
The bottom line is that the g-fees will be going up…and this will impact homebuyers looking to obtain a home loan through Fannie Mae and Freddie Mac.
The good news is that home loan rates are still at historic lows right now, and it’s a great time to purchase a new home or refinance.