What Are Guarantee Fees?
Let me explain what guarantee fees are: they're the sums of money you pay to the issuer of a mortgage-backed security (MBS) if you're the holder. This charge covers the issuer's administrative costs and expenses tied to the security, and it also helps cut down on any risk or loss if the mortgages backing the security default. You might hear them called g-fees, and they also apply to charges you pay as a mortgagor to a guarantor for their services.
Key Takeaways
- A guarantee fee is a sum paid to the issuer of a mortgage-backed security.
- These fees help the issuer pay for administrative costs and other expenses and also reduce the risk and potential for loss in the event of default of the underlying mortgages.
- G-fees are also charged by other guarantors for services rendered.
- Fees may be a percentage of the asset value or a fixed amount.
Understanding Guarantee Fees
Issuers of mortgage-backed securities, such as Freddie Mac, Ginnie Mae, and Fannie Mae, charge lenders these guarantee fees for creating, servicing, and reporting on the asset, plus they guarantee to step in and make principal and interest payments even if borrowers default. Typically, the fee is a percentage of the asset's value, though sometimes it's a fixed amount. This payment guarantee forms the core of these fees. Note that upfront fees on Fannie Mae and Freddie Mac home loans were updated in May 2023.
These providers, like Fannie, Freddie, and Ginnie, assist banks by purchasing mortgages from mortgage companies, commercial banks, credit unions, aggregators, and others. Usually, these government-sponsored enterprises (GSEs) fund these purchases by packaging them back to the originators as securitized MBS, which you can then sell or hold. The guarantee fee embedded in the MBS generates revenue for the provider, and ideally, it's enough across all products to handle individual mortgage defaults.
Guarantee fees mainly consist of the credit guarantee provided to the MBS's end owner, but they also cover managing and administering the securitized mortgage pools, reporting to investors and the SEC, and other back-office tasks.
While people often call these fees a form of insurance for MBS, they encompass more services. For example, a bank might charge you a g-fee as the bearer of a note or asset for providing a guarantee. They could also include guarantee fees in the mortgage's interest rate. Unlike upfront fees like document or origination charges, these are applied over the entire loan term.
Important Note
Keep in mind that lenders may charge guarantee fees as part of the interest rate on a mortgage.
Special Considerations
Guarantee fees depend on the creditworthiness and size of the underlying mortgage pool. Before the mortgage meltdown and financial crisis, these fees were just a small deduction of 15 to 25 basis points. In return, the mortgage originator got a sellable asset and cleared the loan from their books to free up credit. It seemed like a great deal for lenders, since MBS providers relied on originators' info to set fees. But banks pushed limits on who qualified for mortgages, leading to NINJA loans and market distortions. The fees weren't adjusted for this, causing a huge meltdown where the U.S. government bailed out MBS providers because the fees didn't cover the real liabilities.
Since the financial crisis and Great Recession, guarantee fees have sharply increased, more than doubling from pre-meltdown averages. The FHFA provides an annual analysis of fees charged by Freddie and Fannie. In 2019, they reported an average of 58 basis points on a 30-year fixed-rate mortgage. These fees don't get much attention outside mortgage industry groups, but there were political pushes for an additional 10 basis point increase via the FHFA to cut future taxpayer risks. Those proposals were suspended before implementation.
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