A guaranty fee, also referred to as a “g-fee,” is one of the costs reflected in the interest rate on a single-family mortgage loan. This fee represents the charge by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac to guarantee that an investor in that loan will receive all scheduled principal and interest payments until the loan is repaid. The guaranty fee is compensation for assuming all credit losses and costs associated with loans that become delinquent and ultimately go to foreclosure.
The g-fee is generally stated in basis points (bps); each basis point represents 1/100th of one percent of the loan amount. For example, a Fannie Mae guaranty fee of 29 basis points to guarantee a newly acquired single-family loan would represent 0.29 percentage points (0.29%) annually of the loan amount paid to Fannie Mae on a monthly basis. We set guaranty fees based on a variety of business and market factors. Since the guaranty fee is typically built into the interest rate charged to the borrower, an increase in g-fees may translate to an increase in interest rates.
Unlike other upfront mortgage fees, commonly known as LLPAs (Loan Level Price Adjustments), the G-fees are charged monthly throughout the life of the loan (affecting the interest rate charged on a loan). LLPAs on the other hand, which are charges by the GSEs for conforming loans, are only a one-time upfront fees charged to adjust for the risk taken on a loan (this affects the price of a mortgage loan).
The impacts that are felt in the Mortgage Arena by the existence of G-fees are evident throughout the marketplace. The major reason for their existence is to drive the yield on mortgage products up to provide an adequate return on capital to lure private capital back into the Mortgage business. The goal of FHFA (GSE Conservator) is to reduce and then eliminate Fannie and Freddie’s roles in the mortgage process. They cannot do the latter until they have an alternative source for the mortgages to be sold, which would be the anticipated private capital market.
The addition of the G-fees and LLPAs charged on conforming conventional loans has caused a pricing phenomenon. In some areas, “jumbo” loans are now cheaper than conforming loans by as much as 50-75 basis points, which the opposite of what it should be. This is probably a good indicator that there is enough g-fees being charged to attract the private capital needed, since that is who typically funds the jumbo loans.