Appleton, Wisconsin (PressExposure) January 19, 2012 -- Effective April 1, 2012, consumers will see an increase in the guarantee fee or "G Fee" on all government-sponsored mortgage-backed securities. This comes as a direct result of Congress passing the temporary two-month payroll tax extension to offset the $35.7 billion cost that was created by this extension.
This measure will remain in effect until Oct. 1, 2021.
In simple terms, the G Fee is paid by lenders to the mortgage-backed security providers such as Fannie Mae, Freddie Mac and HUD to protect against losses that stem from credit risk. It is an insurance premium paid by the lender to the provider, and it is deducted from the coupon rate and credited to the provider. Portions of the fee cover administrative expenses as well.
So how will this new fee affect borrowers?
"This increase is already affecting borrowers whose loan transaction interest rates have not been locked in with their lender," said Mike Cox, 12-year veteran of the mortgage industry and host of Rates in Motion.
He added, "Many people will already see the G Fee increase even though it is not effective until April 1. The reason being, the loan sale and securitization cycle and protocol may experience delays that would force the investor to cover the cost of the additional fee if the loan is securitized after the April 1 start date. Since the process has experienced delays, the 'better-safe-than-sorry' approach has been taken, resulting in an additional .25 to .50 exponential increase in pricing for borrowers whose loans were not locked in."
As an example, Cox said on a $200,000 mortgage additional fees tally anywhere from $500 to $1,000 for the borrower or about .125 in note rate.
Cox said the fee could discourage borrowers from refinancing their loan because the additional fees may lengthen the time for borrowers to receive the net tangible benefit of the interest rate reduction.
"On the home purchase side it boosts the interest rate or fee - which will reduce the amount of the loan that borrowers would receive for home loan purchases. The average borrower qualified to purchase a more expensive home prior to the announcement of the fee increase," Cox said. Cox said there is a way for borrowers to avoid the new fee, but "it is very limited."
"There are portfolio products offered by some banks and lending institutions that would not be impacted by the fee increase. These programs are usually very restrictive on qualifications," Cox said.
To learn more about Rates in Motion, visit http://www.ratesinmotion.com.