A Peak Inside "G-fees"

The Federal Housing Finance Agency ("FHFA") has released its annual report to Congress and there are a couple of interesting bits of information that are revealed about the guaranty fees ("G-fees") that are collected by FNMA and FHLMC for the guarantees that they issue in connection with mortgage loans and mortgage-backed securities.  The first thing that is listed in an article in Mortgage News Daily  that was released mid-afternoon, Friday 11.21.2014, is that the G-fees have doubled since 2009.

Generally the formula for determining G-fees is based on three costs.  The GSEs determine the cost of expected losses, add the cost of capital held to cover losses, and add the costs of general and administrative expenses.  Sounds simple enough, right?  An analyst for Mortgage News Daily is of the opinion that FHFA needs to provide an explanation for what appears to be G-fee padding which the analyst found to be a significant source of income.  The analyst indicated that the fee padding is one way in which the FHFA encourages the privatization of mortgage guarantees.

In March 2008, the G-fees were increased by 25 basis points to cover the then existing adverse market conditions.  That fee would have been eliminated this past January as part of the fee increase that was postponed by then newly-appointed FHFA Director Mel Watt for further study.  So, borrowers who put down less than 20% for their home purchase are still paying for the mistakes in the pre-2008 era.

A second item that actually makes up the G-fees being paid today relates to the "withholding tax holiday" that most employees enjoyed in 2011 and 2012.  In the Temporary Payroll Tax Cut Continuation Act of 2011 (Public Law 112-78, passed 12.23.2011), which extended the tax holiday into 2012 from its origination in 2011, Congress took the opportunity to get involved in requiring FNMA and FHLMC to increase G-fees by a minimum of ten basis points.  The increase was phased in over two years and does not expire per the terms on Public Law 112-78 until October 1, 2021.

So, if you do not buy a house with less than 20% down during the period from 2012 through 10.1.2021, you truly got the benefit of the tax holiday.  However, if you bought a house, or if you buy a house, with less than 20% down at anytime between 2012 and 10.1.2021, you will be forfeiting some of the taxes you saved during the 2011-2012 tax holiday because the G-fee you pay for your mortgage will include ten basis points that are built into G-fees to, apparently, cover the cost of the tax holiday. 

And you thought the federal government was being a nice guy.  Think again.  It will be interesting to see if the new guidelines due out in Q1 2015 for G-fees still includes the elimination of the adverse market component of the current G-fees.  It is truly worthwhile to keep your eyes open for these guidelines and read them carefully.