Pressure on G-Fees
Do lenders pay too little, or too much, to protect themselves from credit risk on loans sold to Fannie Mae and Freddie Mac? After years of absorbing downward pressure on guarantee fees, the government-sponsored enterprises seem to be putting on the brakes. Both have indicated that they'd like to see average g-fees stabilize or move upward this year.
But recent news suggests that lenders are not ready to give up the fight for lower fees. Recently, Bank of America ended its exclusive selling arrangement with Freddie Mac, apparently hoping it can get a better deal by playing the field with both the GSEs. Wells Fargo was rumored to be unhappy about its deal with Freddie Mac, though some ascribed that to posturing in the negotiation process.
Traditionally, lenders paid 19 basis points annually for the imprimatur of a GSE backing full payment of principal and interest to investors, a rate not much smaller than the traditional servicing fee of 25 basis points that is paid to the lender to manage the loans. Last year, Fannie Mae reported that the guarantee fee on outstanding MBS averaged 19.1 basis points last year, up slightly from 19 in 2001.
Freddie Mac reported that its average guarantee fee was 18.5 basis points in 2002, down slightly from 18.7 in 2001. However, strong business volume meant that guarantee fee income totaled $1.9 billion last year, up from $1.6 billion the year before.
Meanwhile, despite concern about mortgage credit quality, the prime quality loans typically sold to Fannie Mae and Freddie Mac continue to perform astoundingly well. As a result, credit losses have been incredibly low. At Freddie Mac, credit losses represented just 0.7 basis points of its average total outstanding mortgage portfolio in 2002, unchanged from the previous year.
It's easy to see why managing credit risk is a very, very profitable business for the GSEs. It's also easy to see why lenders, especially the big ones, are seeking ways to minimize the fees they pay for credit protection. We don't expect to see any substantial rise in g-fees anytime soon. Unless delinquencies and defaults on prime loans start to rise markedly, it is unlikely that the GSEs will be able to increase the g-fee rates anytime soon.
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