GSEs’ Mortgage Guarantee Fees on the Downswing

The average guarantee fee charged by Fannie Mae and Freddie Mac on single-family mortgages fell to 22 basis points in 2009, dipping down from 25 basis points in 2008, according to a report released by the Federal Housing Finance Agency (FHFA).


FHFA said these fees cover projected credit losses from borrower defaults over the life of the loans, administrative costs, and a return on capital.

The decline in guarantee fees reflects reductions in both the average ongoing fee and the average upfront fee. According to the report, the average ongoing fee fell to 13 basis points from 14 basis points, and the average upfront fee dropped down to 9 basis points from 11 basis points.

FHFA said the drop in total guarantee fees in 2009 resulted from a significant improvement in the credit profile of the single-family mortgages the government-sponsored enterprises (GSEs) acquired relative to 2008. On a year-over-year basis, there were improvements across the product, credit score, and loan-to-value ratio spectrums.

These improvements came as 15-year fixed-rate mortgages grew as a share of total acquisitions, borrower credit scores improved, and fewer loans with down payments were acquired. In addition, the share of mortgages with risk layers—multiple features that increase credit risk—fell significantly from one year to the next.

According to FHFA, the positive development in the credit profile of enterprise acquisitions in 2009 also reduced the average expected costs of bearing the credit risk of those loans. The agency said the net effect of lower costs and lower guarantee fees charged was an improvement in the estimated fee gaps for the three major product categories, including 30-year fixed-rate, 15-year fixed-rate, and adjustable-rate mortgages.

For mortgages acquired in 2009, each GSE set the guarantee fees at levels sufficient to cover expected costs and to provide a modest return on capital. The sole exception to this policy was for loans originated under the Home Affordable Refinance Program (HARP), which offers Fannie and Freddie a benefit in the form of reduced credit exposure. Although the fees charged for HARP loans were not expected to achieve the targeted rate of return, FHFA said the new loans should perform better than the mortgages they refinanced.