On top of the previously announced 10 basis point increase in Fannie Mae and Freddie Mac guarantee fees, Fannie and Freddie have published new Loan Level Price Adjustments (LLPAs) which will be effective April 1, 2014. The primary effect of the adjustments is to increase LTV/Credit Score LLPAs by 25 to 150 basis points. Offsetting these increases somewhat, the 25 basis point Adverse Market Delivery Charge will be eliminated for all states except New York, New Jersey, Connecticut, and Florida.
We have received a few questions today about why mortgage-backed securities (MBS) prices do not show the same drop in prices as seen from the Fannie Mae window. The reason is that Fannie Mae, this morning, built into their whole loan prices an increase in their required guarantee fee (G-fee). Since G-fees are paid from the borrower's loan rate and not by the owner of an MBS, MBS prices are unaffected by a change in G-fees. Most lender rate sheets began reflecting the increase in G-fees over the last few weeks, depending on lock term and delivery method.
FHFA has answered a couple of the questions we raised on Tuesday regarding the Congressionally mandated increase in Fannie Mae and Freddie Mac guarantee fees (G-fees). Effective April 1st all G-fees charged by Fannie and Freddie will be increased by 10 basis points. In addition, FHFA said that during the first part of 2012 they will determine whether the new law will require additional increases in the G-fees. Since G-fees are paid from the interest on a loan, this increase will cause mortgage rates on loans going into Fannie and Freddie mortgage-backed securities after April 1st to rise by a similar amount.
On Friday, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act. This Act uses increased guarantee fees on new mortgages to pay for reduced payroll taxes. The amount of the g-fee increases will be included in future mortgage rates. Below are general provisions pertaining to increasing the Guarantee Fees for Fannie, Freddie, and FHA. Several elements in the bill are not quite clear and may take weeks or months to determine. The primary questions are: 1. How much will the Fannie and Freddie g-fee rise? The Act calls for a minimum increase of 10 basis points, but the amount of the increase is to be determined by FHFA and is supposed to a)"cover the risk of loss associated with the guarantee", and b) be based on "the cost of capital allocated to similar assets held by other fully private regulated financial institutions". This definition could result in a wide range of fee increases. The early expectation from insiders is that the increase will be 10 basis points. 2. When will the increase become effective? The Act says the increase is to be applied to guarantees issued after enactment of this section. The date this provision is to [...]