INSIDE the interest rate quoted on your home mortgage lies a small hidden fee that has been charged by government-sponsored entities like Fannie Mae and Freddie Mac for more than three decades. It’s an add-on rate known as the guarantee fee.
An increase in the fee has been mandated by Congress to occur this spring, and other increases are likely later this year and next. When they happen, interest rates on single-family mortgages resold to Fannie Mae or Freddie Mac are likely to inch up as well.
“It’s going to be silently passed through” by lenders when it does increase, said Richard W. Grohmann, a real estate lawyer in Paramus, N.J.
The G-fee — as it is known — does not show up in borrowers’ mortgage documents or good-faith estimates, and it is little known outside the industry.
“It gets incorporated into the underlying rate that the borrower pays,” said Andrew Wilson, a spokesman for Fannie Mae.
An interest rate is usually made up of three parts: the largest goes to the bank or the investors who buy the loan; a smaller portion is for the mortgage servicer that collects monthly payments; and then there’s the guarantee fee. Fannie and Freddie charge guarantee fees as a form of insurance against default for the loans they acquire and resell to investors.
The G-fee will rise 10 basis points on April 1; the increase was included in the two-month extension of the payroll tax reduction last December. (A basis point is equal to one one-hundredth of 1 percent, or 0.01 percent.)
Keith T. Gumbinger, a vice president of HSH Associates, a financial publisher in Pompton Plains, N.J., says the increase in the guarantee fee will very likely push up mortgage rates on new loans by one-eighth of a percentage point. “While it is most common to build the G-fee into the loan’s rate, it doesn’t have to be done that way,” he said in an e-mail, noting that some lenders might charge a flat fee instead.
Already, though, loans with interest-rate locks from the last 45 or 60 days have the higher guarantee fee written into them, according to Tom Kelly, the president of Investors Home Mortgage, a division of Investors Bank in Short Hills, N.J. Lenders say they need the extra lead time because it may take time to close the loan, package it and send it on to Fannie or Freddie.
One way to avoid the guarantee fee is to use a lender that does not sell off its loans — for instance, a community bank or a credit union.
Besides offsetting risks, the fees provide a primary source of revenue for Fannie Mae and Freddie Mac. Fannie, for instance, made $5.6 billion in single-family guarantee-fee income in the first nine months of 2011, a 4.7 percent increase from the 2010 period, according to its quarterly financial statements.
Fannie and Freddie have collected G-fees since the introduction of mortgage-backed securities in the early 1980s. “It was variable from the start, based on the volume level of loans” made by the lender, Mr. Kelly said.
Both organizations started raising fee rates in 2008 during the housing crisis, as foreclosure costs rose. G-fees gained modestly in 2010, and also last year.
New single-family loans acquired by Fannie Mae were charged a guarantee fee of 31.1 basis points, on average, in the third quarter of 2011, the most recent period for which data are available. That is six points higher than in the third quarter of 2010. Rates on multifamily loans are 15 to 20 basis points higher than on single-families.
“We expect that single-family guarantee fees will increase in the coming years,” Fannie Mae said in its third-quarter report to investors, “although we do not know the timing, form or extent of these increases.”
In a letter to Congress last month, Edward J. DeMarco, the acting director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, suggested “continued gradual increases.”
The New York Times
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