What is happening and why? To put it bluntly, the passage of the
payroll tax cut extension is being funded via a mandate to Fannie
Mae and Freddie Mac (the nation's largest providers of mortgage money)
to increase their guarantee fees or "g-fee's" by at least
10 basis points on the rate. So rather than giving a par rate of
4.00%, for example, the par rate is now increased by at least
10 basis points, or approximately 4.10%. But as you probably
know home loan rates are priced and offered in .125% increments,
so this will most likely impact the consumer by .125% in rate.
It was estimated that the increase will ultimately pay for about
$35.7 Billion of the cost of the payroll tax extension.
What exactly is this "g-fee"? The guarantee fee or "g-fee" is
an amount charged by mortgage-backed securities (MBS) providers,
like Freddie Mac and Fannie Mae, to help protect against
credit-related losses in the overall mortgage portfolio.
In other words, it acts a lot like insurance and helps
lower the overall risk which means home loans can be offered at
terrific interest rates to borrowers that have good - but not
perfect - credit.
What exactly is the impact of the rate increase? For example, for
a $200,000 home loan, the increased g-fee (assuming a .125% increase in rate)
would equate to $250 more per year in interest, or $7,500 more over 30 years.
Who will this impact? The change will impact all new borrowers of Fannie Mae
and Freddie Mac loans. The bill will also impact Federal Housing Administration
(FHA) loans by increasing the annual mortgage insurance premium that borrowers
pay by one-tenth of a percent.
When will it start? Officially, the increase to guarantee fees will
begin on April 1, 2012. However, the increase is already starting to
be seen in rate sheets right now, since home loans being originated
now will likely not be closed, pooled and securitized until April
and therefore will need the increased g-fee priced in earlier.
How long will this be in effect? The increase will be effective
through October 1, 2021.
