Just when you thought home loans were getting cheaper, the little-known “g-fee” is getting bigger.
The Federal Housing Financial Agency (FHFA) recently announced an increase of 10 basis points in the guaranty fee, or “g-fee,” a fee paid to government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which the FHFA oversees.
The increase could add 20 to 50 basis points to the cost of a mortgage.
Bottom line, for a borrower with a 30-year, fixed-rate mortgage near the current conforming loan limit of $417,000, the extra cost adds an estimated extra $8,500 over the life of the loan.
Why jack up the g-fee?
The increase is effective Nov. 1, 2012, but lenders already may be factoring in the increase in current mortgages. Also, borrowers in some states where risks are deemed higher – Connecticut, Florida, Illinois, New Jersey, and New York, right now – could have an additional 15 to 30 basis points tacked onto the g-fee.
Unfortunately, the g-fee increase offsets recent savings enjoyed in loan closing costs.
The average cost to close on a mortgage dropped seven percent over the past year, saving mortgage consumers an average $300 on each home loan, according to recent research from Bankrate.com.
GSEs, however, must raise the fee to cover their assets in an uncertain economy with a housing market that hasn’t fully recovered.
GSEs charge a g-fee to cover the risk of guaranteeing that the loan’s investors will collect all scheduled principal and interest payments over the term of the loan. The fee is a hedge against the risk of borrower default.
The FHFA previously increased the g-fee by 10 basis points in April 2012 under a Congressional mandate to help cover the cost of the two-month extension on the Temporary Payroll Tax Cut Continuation Act of 2011.
The latest increase in the g-fee is designed to encourage greater participation in the mortgage market from private firms to reduce GSEs’ role and risk in the market place. However, given private lenders’ continued aversion to risk in today’s market, it may take some time for the desired effect.
Meanwhile, the more expensive g-fee cost is passed onto consumers.