You’ve heard of the G-7 -- a group of powerful industrialized nations. And you know about G-force, the gravitational pull people feel from sudden acceleration. But do you know anything about G-fees?
You should, because if the White House has its way, homebuyers could soon be paying a few thousand more G’s for financing.
Short for guarantee fees, G-fees are what companies like Fannie Mae and Freddie Mac charge lenders to create, service and report on the securities they sell to investors worldwide.
Mortgage borrowers will never come in contact with these two government-sponsored enterprises. But they are critical to the financing supply line because they buy loans from your lender and hundreds of others, thereby keeping funds flowing for the next round of homebuyers coming behind you.
Fannie and Freddie, or the GSEs, turn some of those home loans into mortgage-backed securities. And they guarantee that investors who buy those securities will be paid their promised principal and interest, even if borrowers whose loans are in the package default. Hence, the G-fee.
Lenders pay the fee. But guess what? They pass it on to borrowers as part of what you pay for financing. And now the Trump administration, like others before it, has its eyes on the fee.
As it has every time it has needed to pay for the White House’s largesse, Trump’s budget for fiscal 2021 calls for raising the fee. In other words, the administration is looking to place the cost of at least some of those massive tax cuts -- the ones many people say largely benefited the rich -- on the backs of homebuyers.
According to the latest figures from the GSEs’ federal regulator, the average fee on single-family mortgages increased by 2 basis points -- to 55 basis points -- in 2018. A basis point is 1/100th of a percentage point. And that includes an extra 10-basis-point charge put into place in 2011 to fund a “temporary” payroll tax cut.
Now, a tad over one-half a percentage point doesn’t sound like a whole lot. But that’s part of the interest rate you are paying on your loan -- over the entire life of the loan. Roughly calculated, that’s an extra $14 a month on a 30-year, $255,000 mortgage at today’s rates. And that comes out to a bit over $5,000 over 30 years.
The basic fee isn’t going away anytime soon, if ever. But if the administration has its way, the charge will go up 10 basis points when the new fiscal year kicks in, in September. It’s not clear yet whether the new fee would be on top of the temporary fee, which expires in 2021, or in its place.
Over a 30-year term, 10 basis points on the $255,000 mortgage mentioned above amounts to an additional $5,100 in interest, for a total of $10,100 and change. If it clears Congress, everyone who takes out financing touched by Fannie Mae and Freddie Mac over the next 10 years will pay the price -- to the total tune of $34 billion, according to White House estimates.
“G-fees have become a bit of a go-to for congressional ‘pay fors,’” says Jann Swanson of the Mortgage News Daily newsletter. In 2015 and 2017, for example, the Senate tried to add 10 basis points to the G-fee to partially fund a highway construction act.
The proposed increases failed, and the White House is likely to fail this time around, too. But it is something worth keeping an eye on. Thirty-two housing-related trade groups certainly are. In a letter of support for bipartisan legislation that would prohibit using G-fees as a budgetary offset, the groups said the fees should be used only as originally intended: as a risk-management tool to protect against potential credit losses.
The trades, including such political powerhouses as the National Association of Home Builders, the National Association of Realtors, the Mortgage Bankers Association and the American Bankers Association, don’t want the G-fee removed entirely, or even reduced -- though they secretly wish it could be.
But they do object to using the fee as “the nation’s piggybank,” they wrote in their letter to Congress. The group supports bipartisan legislation -- sponsored by Sens. Robert Menendez, D-N.J., and David Perdue, R-N.Y., and Reps. Brad Sherman, D-Calif., and Lee Zeldin, R-N.Y. -- that would forever prevent using the fee for any other purpose other than to cover the GSEs’ costs and losses.
Using the charge as a funding mechanism is “wholly inappropriate and shifts the burden of paying for non-housing-related initiatives to the country’s current and future homeowners,” the trades wrote.
In the past, legislators have attempted to cover the cost of such non-housing-related programs as immigration, infrastructure and the environment, all to no avail, largely because they were beaten back by the aforementioned industry organizations. The fee was last increased, temporarily, in 2011.
“That increase harmed homebuyers by raising the cost of homeownership in all parts of the country, and continues to do so,” the trade groups wrote.
Now, they are fighting the good fight again. “As representatives of institutions that span the entire housing finance ecosystem,” they wrote, “we firmly believe that G-fees should only be used as originally intended.”
The trades also cautioned that any increase in the fee would exacerbate the already difficult affordability challenges faced by first-time buyers. “The unintended effects of any proposed G-fee increase or extension -- no matter how well-intended -- will be to raise the cost of homeownership for middle-class Americans,” they said.