The g-fee increase consists of three distinct components. First, the base g-fee—or ongoing g-fee—for all mortgages will increase by 10 basis points.
Second, the up-front g-fee grid will be updated to better align pricing with borrowers’ credit risk characteristics.
And third, the up-front 25 basis point adverse market fee that has been assessed on all mortgages purchased by the two companies since 2008 is being eliminated except in four states identified as having foreclosure carrying costs that exceed the national average by more than two standard deviations. These states include: New York, Florida, New Jersey, and Connecticut.
Based on the GSEs’ loan purchases in Q3 2013, FHFAexpects the announced changes to the g-fee structure to produce an overall average g-fee increase of approximately 11 basis points, which represents an average increase of 14 basis points on a typical 30-year mortgage and 4 basis points on a 15-year mortgage.
FHFA says these steps will help to contract Fannie Mae and Freddie Mac’s dominant presence in the marketplace gradually over time in an effort to entice private capital to re-enter the market.
The GSEs’ conservator signaled in March that g-fees would continue to increase in 2013 in the interest of furthering FHFA’s strategic plan for the two mortgage financiers. The regulator has raised Fannie and Freddie’s g-fees twice already—first in December 2011 and then again in August 2012, both of which entailed a 10 basis-point increase.
“Today’s price changes improve the relationship between g-fees and risk,” commented Edward J. DeMarco, FHFA’s acting director. “The new pricing continues the gradual progression towards more market-based prices, closer to the pricing one might expect to see if mortgage credit risk was borne solely by private capital.”
With a nod to the American taxpayer for “providing the capital support that keeps these companies operating,” DeMarco added that the new structure better protects taxpayers by reducing their credit exposure and offers them greater returns, while encouraging private capital to return to the mortgage market as an eventual surrogate of the GSEs.
FHFA called the g-fee changes, including the updates to improve the pricing framework’s sensitivity to risk, “important steps to enabling Freddie Mac and Fannie Mae to deepen and broaden the risk-sharing transactions with private investors they initiated this year.” In the coming years, FHFA said it expects risk-sharing transactions to cover a growing portion of the GSEs’ new business and the amount of risk transferred to private capital to continue to increase.
For loans exchanged for mortgage-backed securities (MBS), the price changes go into effect starting April 1, 2014. For loans sold for cash, the price changes are effective March 1, 2014.