This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Fed's QE3 Should Soften G-fee's Impact

With an eye to leveling the playing field between Fannie Mae and Freddie Mac and the private mortgage market, the Federal Housing Finance Agency has directed the GSEs to hike their guarantee fee, or "g-fee," beginning in November 2012.

Ed DeMarco, acting director of the FHFA, said in a press release, "These changes will move Fannie Mae and Freddie Mac pricing closer to the level one might expect to see if mortgage credit risk was borne solely by private capital."

The g-fee, which is slated to increase by an average of 10 basis points, is a fee that Fannie and Freddie charge mortgage lenders they buy loans from to securitize. The fee serves to protect the lenders from credit losses on the loans that go into mortgage-backed securities.

What does this mean for mortgage borrowers?

The average g-fee is currently 26 basis points. The increase could send the fee up to as high as 50 basis points, making for a maximum hike of 24 basis points, according to Malcolm Hollensteiner, director of retail lending sales with Cherry Hill, N.J.-based TD Bank.

"Obviously, if you have a 10 to 24 basis point hike, we would assume that lenders that are selling their loans to Fannie Mae and Freddie Mac would have to pass on some of that increase to the consumer," says Hollensteiner.

The increase won't necessarily translate into an average mortgage rate increase of 10 basis points, but based on past experience, Hollensteiner expects that borrowers will end up paying one-eighth of a percent more on average, either in the form of higher interest rates or discount fees.

QE3

However, there is another factor at work that might serve to offset the impact of the g-fee hike -- " QE3." On September 13, the Federal Reserve embarked on the third installment of their asset-purchase efforts to push long-term interest rates lower. The aggressive plan is to buy $40 billion in mortgage-backed securities each month until the economy, specifically employment, improves.

Keith Gumbinger, vice president of HSH.com, said in an email that QE3 may have been done in part to anticipate the upcoming g-fee hike and its potential effect in pushing mortgage rates higher.

"With the Fed a more active buyer (of MBS), they can manipulate the price in the market so that the new fee has little or no net effect on the consumer's price. Even though, on an absolute basis, the cost of mortgage money is higher, it's a matter of 'it would be higher except for the Fed's influence.' "

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs