Monday, September 24, 2012

Raising "G-fees" is FHFA's Way Of Loosening Up Lending In High Risk States

Starting in 2013, the FHFA plans to increase G-Fees charged on single family mortgages.  The charges are only to be increased in those states that have the highest rate of defaults.

What are G-fees you ask?  G-fees or "guarantee fees" are basis points charged by Mortgage Backed Securities providers for bundling, servicing, selling, and reporting to MBS to investors.  It's primary purpose is to protect against losses from defaulted MBS.

Currently, the rates for G-fees are the same across the country.  But, next year, states with higher foreclosure rates will be paying in excess of 15-30 more basis points for G-fees.  The current average rate of G-fees are 15-25 basis points.  What this means to the consumer is about an increase of $3.50 to $7.00 per month on a mortgage for around $200,000.

Passing this on to the consumer does not place responsibility on the banks, and still presents the same issues we faced half a decade ago.  If the bank or servicer responsible for packaging the MBS paid for the G-fees, it would more than likely ensure proper packaging of securities. If the banks are not directly being impacted by these fees, what does it matter to them to continue to package loans as ineffectively as they did in the past?

What this presents to me is not a way of presenting defaults from occurring, but rather opening up the tight reigns of lenders in states with the most defaulted MBS.  It has been difficult, if not impossible  to secure a mortgage in states such as Florida, New Jersey, Connecticut, New York, and Illinois since the mortgage meltdown at the end of 2006.  Now that these states will be charged an increased premium in G-fees, lenders will be able to loosen guidelines for borrowers.

As the market appears to be bottoming out and actually showing very mild appreciation, over optimism is allowing for business to resume as it did in the past.  Charging more "fees" to allow lenders to write paper for unqualified borrowers sounds a lot like "sub-prime mortgages" to me.  Creative methods are great, but must have a control to acquit for economic stability.

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