Whodunit? The Crime of Rising Rates

Mortgage rates and costs are headed up thanks to the federal government’s policy of passing the buck to fund a temporary payroll tax cut extension. Fannie Mae announced on December 30, 2011, that the Federal Housing Finance Agency will increase “g-fees” on single-family mortgage-backed securities charged by the government-sponsored enterprises by 10 basis points effective April 1, 2012.

I’m not sure if you read over that first sentence but this is in response to the new funding mechanism for the payroll tax cut extension passed by Congress.

I feel like one of the detectives in one of those crime shows staring at a white board trying to figure out how payroll taxes have anything to do with loan rates; so far, I don’t have any solid leads.

First, we need to solve the question, “what the heck are g-fees?”  They are the loan guarantee fees, or more simply, the funding costs to lenders when they hock their loans.

The less simple defintion of  ”g-fees”  is they are fees charged by mortgage-backed securities (MBS) providers, such as Freddie Mac and Fannie Mae, to lenders for bundling, servicing, selling and reporting MBS to investors. The main component of the guarantee fee is charged to protect against credit-related losses in the mortgage portfolio (think of it like MBS insurance), but small sub-fees are also deducted to cover internal expenses. Quantitatively,  it is small deduction, about an average is 15-25 basis points in relation to the stated coupon (interest) rate.  The fee allows the corporations selling the mortgage backed securities to make a profit, while benefiting both mortgage lenders and borrowers by making groups of mortgages more marketable and liquid. This helps bring investor capital into the business, allowing all participants to lower their risk exposure and enabling them to offer mortgages to borrowers of lower credit quality.  In layman’s terms, the banks free up their capital by selling their “conforming” loans to Fannie and Freddie.  That’s why it is so important that loans “conform” to the Fannie Mae guidelines.  If they don’t, that loan may not be able to be cleared from the lender’s books.

It’s hard to say exactly how this change will impact borrowing costs from lender to lender across the board, but because Fannie Mae financing is so prevalent in the mortgage market today, there’s no question it will raise costs for mortgage borrowers.

Here’s an excerpt from a bulletin from one of my lenders on how it will affect the rates:

As directed by the Federal Housing Finance Agency (FHFA), pursuant to the federal Temporary Payroll Tax Cut Continuation Act of 2011 (Act), Fannie Mae must increase by 10 basis points the guaranty fee that we will charge for all single-family mortgage loans delivered on or after April 1, 2012. To comply with this directive, we will increase by 10 basis points the guaranty fee applicable to single-family loans in MBS pools that have issue dates on or after April 1, 2012. Fannie Mae will make similar adjustments to the base pricing for single-family loans committed through its single-family whole loan programs and other negotiated transactions.

Here’s anothe excerpt from another lender:

As a result of the Temporary Payroll Tax Cut Continuation Act of 2011, effective January 23rd, 2012, (we) will implement a 50 basis point decrease to our base pricing to accommodate the increased loan guarantee fee (G-Fee) for all Conforming Conventional (including High Balance) Loans, as described below:

I don’t know if you followed the math there or not, but Fannie Mae is increasing 10 basis points and the lenders are increasing 50 basis points.  Not only is the buck getting passed again, it turns into five bucks by the time it get to you, the consumer.

What does it mean?  If you have a loan already locked and in process, this likely won’t have an impact. New rate locks won’t be impacted either, as long as the loan can be delivered to Fannie Mae before the April 1^st deadline – which means it likely needs to fund within the next 30 days (*hint, *hint:  Act now if you haven’t already).  If you are are affected by the fees, according to the bulletins, you will likely pay .5 percent more for your loan.  On a $400,000 loan, that’s a difference of $2,000, while Mortgage Bankers Association CEO David Stevens said the increase could mean an extra $4,000 in fees on a $200,000 mortgage.

They call it “temporary,” but the fee isn’t likely to go away soon as it is slated to remain in effect through Oct. 1, 2021; that’s about as temporary as a gun shot wound and almost as painful. Who is the shooter? Well, the GSR is all over President Barack Obama’s hands; he signed the temporary two-month payroll tax cut last week after House and Senate leaders reached a last-minute deal prior to the holiday break.

The Congressional Budget Office estimated the g-fees would offset about $35.7 billion in the costs of the tax cut.  So again, it’s the big business that has negatively impacted the lending and housing market. So there’s your answer on “whodunit?”  Unfortunately, they’re going to get away with this crime.

Steve Bush operates OC Loan Broker as a sole-proprietor mortgage broker and specializes in low-cost, low-rate refinance loans.  You can reach him at  Steve@OCLoanBroker.com or (562) 726-2874.

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