Guarantee Fees are defined as fees charged by mortgage-backed securities (MBS) providers, much like Fannie Mae and Freddie Mac (along with other GSEs) for bundles, servicing and selling to investors. The general conceit is to charge to protect against credit-related losses in one’s portfolio. There are, of course, additional fees packed into G-fees that cover things like the sale of MBS to investors, reporting to investors and the Securities and Exchange Commission (SEC), etc.
Back in March, Housing Wire reported that Federal Housing Finance Agency (FHFA) Acting Director Edward DeMarco was looking to remove equity placed in GSEs and put whatever recovered funds into private capital. One way of doing that was to raise G-fees to the point where they achieved balance close to private firms. "A key motivation behind increasing g-fees was to bring the government-sponsored enterprises’ credit risk pricing closer to what would be required by private sector providers," DeMarco said at the time.
Now, it seems, DeMarco is about to have his way. In a recent FHFA report, entitled "FHFA’s Initiative to Reduce the Enterprises’ Dominant Position in the Housing Finance System by Raising Gradually Their Guarantee Fees," the proposal to raise G-fees is outlined by examples through which the FHFA can better-level the playing field for independent businesses and GSEs.
“Although Fannie Mae and Freddie Mac have used financial model outputs and business judgment to set guarantee fees, FHFA and others have argued that federal financial support for the Enterprises has allowed them to set their guarantee fees lower than would otherwise have been the case,” reads the report.
“FHFA has stated that its initiative is consistent with efforts by Congress and the Administration to reform the housing finance system. Many housing finance reform proposals call for the elimination of the Enterprises in their current form and their replacement with a new structure,” said the Report. "For example, in 2011 HUD and Treasury issued a white paper that proposed several approaches to housing finance reform all of which would eliminate the Enterprises in their current form. FHFA’s proposal to downsize gradually the Enterprises’ market presence appears to be an attempt to provide a foundation for whatever strategy is ultimately adopted.”
While the FHFA isn’t calling for the immediate dissolving of the GSEs, it is, in fact, looking to “weaken” them by eliminating aspects that make them more attractive lenders to potential consumers. While not necessarily a bad thing, a level playing field is what the consumer market demands, and it looks like this latest report is gearing to provide just that.