What Are Guarantee Fees?
The term guarantee fee refers to the sum of money paid to the issuer of a mortgage-backed security (MBS) by the holder. This charge helps the issuer cover administrative costs and expenses related to the security while also mitigating risks of potential losses from defaulted mortgages. Sometimes called g-fees, these fees are also paid by a mortgagor to a guarantor for services rendered.
Key Takeaways
- A guarantee fee is a sum paid to the issuer of a mortgage-backed security.
- These fees help cover administrative costs and reduce risks from defaulting mortgages.
- Guarantee fees can also be charged by other guarantors for their services.
- Fees may be structured as a percentage of the asset value or as a fixed amount.
Understanding Guarantee Fees
Issuers of mortgage-backed securities, such as Freddie Mac, Ginnie Mae, and Fannie Mae, charge lenders guarantee fees for creating, servicing, and reporting the asset. These fees ensure that the provider will intervene to make sure payments of principal and interest are made even if borrowers default. While the fee is often a certain percentage of the asset’s value, it can also be a fixed amount.
Providers, like Fannie, Freddie, and Ginnie, assist banks by purchasing mortgages from various entities such as mortgage companies, commercial banks, and credit unions. These government-sponsored enterprises (GSEs) usually convert these mortgages into securitized MBS, which the originators can then choose to sell or keep. The embedded guarantee fee acts as a revenue stream for the MBS provider and aims to cover potential individual mortgage defaults across the products.
Guarantee fees not only signify the credit guarantee to the end owner of the MBS but also cover costs associated with managing and administering securitized mortgage pools, investor reporting, and other back-office tasks.
Though often compared to insurance for mortgage-backed securities, guarantee fees encompass more than just risk coverage. Banks may charge g-fees for a variety of services related to mortgage guarantees, sometimes integrating these fees into the interest rates on mortgages.
Special Considerations
The setting of guarantee fees depends on the creditworthiness and size of the underlying mortgage pool. Before the financial crisis, these fees were a small cut of 15 to 25 basis points, enough to create a market-driven asset while removing loans from a lender’s books to free up credit. However, the simplicity of this model fostered market distortions, like the proliferation of NINJA loans, as MBS providers failed to adjust fees adequately for risk.
Post-crisis, guarantee fees have doubled from pre-crisis levels. Now, they average around 58 basis points for a 30-year fixed-rate mortgage, as reported by the Federal Housing and Finance Agency (FHFA). Despite industry critiques and legislative interests aiming to cushion future financial risks, actions to significantly hike guarantee fees have been stalled or suspended.
Related Terms: Mortgage-Backed Security, Freddie Mac, Ginnie Mae, Fannie Mae, Credit Unions.
References
- Federal Housing Finance Agency. “Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2007 and 2008”, Page 23.
- Federal Housing Finance Agency. “Fannie Mae and Freddie Mac Single Family Guarantee Fees in 2013”, Page 19.
- Federal Housing Finance Agency. “Reports and Plans”.
- Federal Housing Finance Agency. “Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2019.”
- United States Congress. “H.R. 3765 - Temporary Pay Roll Tax Cut Continuation Act of 2011”.
- Federal Housing Finance Agency. “Guarantee Fees History”.
