A mortgage rate is made up of 3 components: (i) the rate paid for the use of the money for the duration of the loan, which usually goes to the bank or investors who buy the loan (the largest component), (ii) a servicing fee that goes to the mortgage servicer who collects the monthly payment, and (iii) the guarantee fee. Freddie Mac and Fannie Mae charge a guarantee fee to offset against defaults for loans that they buy and sell to investors. Think of it as insurance.
The guarantee fee, also known as the G-fee, will rise 10 basis points [1 basis point = 1/100 of one percent, or 0.01%] on April 1st. This increase was part of the two month payroll-tax reduction extension, that was passed last December. The G-fee does not get explicitly charged to a borrower. In other words, it does not show up on good-faith estimates or mortgage documents. Instead, the fee gets incorporated in the interest rate the borrower pays on the mortgage. This new increase in the G-fee is estimated to increase mortgage rates by 1/8 of a percentage point. The total guarantee fee for a loan for a single-family home is currently on average 31.1 basis points of the loan value.
The G-fee has been around since the early 1980’s. In addition to offsetting Freddie Mac and Fannie Mae’s default risk, it has been a primary source of revenue for both entities. Fannie Mae made $5.6 billion in single-family G-fee’s for the first 3 quarters of 2011. The only way to avoid the G-fee is to use a lender that does not sell its loans to Freddie Mac or Fannie Mae, such as community banks and/or credit unions. Mortgage rates will definitely be increasing in the future because of the G-fee. Even though the new increase does not go into effect until April 1st, many lenders are incorporating the increase in their rates now, as it usually takes 30-60 days to fund loans.