Impending G-Fee Increases Fannie Mae Production

By Stevie Duffin Updated on 12/14/2012

By Daniel Duffield

Agency mortgage-backed securities (MBS) total distribution increased dramatically in November as a result of a rise in Fannie Mae’s production, which analysts believe was driven by the prospective hikes for guarantee-fees on mortgages.

According to MBS strategist Sarah Hu of the Royal Bank of Scotland, this surge in production could be stem from several sources, although she credits some of this increase to borrowers hoping to secure mortgage refinance loans before the G-fee hikes take effect.

Agency MBS expanded 45% each month from $138 billion in October to in excess of $200 billion in November. Fannie Mae mortgage products rose 76%, increasing from $60 billion to $105 billion, said MBS strategists Hu and Ashley Gam of RBS.

In addition, total net production increased from negative $15 billion to $56 billion, reaching the most prominent rise in supply since August 2009, before the onset of the negative effects of the housing bubble burst.

The Federal Housing Finance Agency (FHFA) has outlined five states in the plan to alter the currently active guarantee fees that Fannie Mae and Freddie Mac levy for single-family mortgage loans. Essentially, this increase aims to restore a fraction of the “exceptionally high costs” which the government sponsored agencies (GSE) take when borrowers go into default within these particular states.

Bank of America Merrill Lynch experts have additionally stated that these g-fees may increase by up to 30 to 50 basis points to meet the recent private brand execution during 2013.

This constitutes a threefold increase from the previous guarantee fees levied by lenders at approximately 10 basis points to stimulate private funds and encourage growth in the market.

In September, interest rates fell to record lows after the release of the Federal Reserve’s plans to bring about an end to the QE3 program, or the third round of quantitative easing, which had been inciting an increase of purchase and refinance loan acquisition, said Hu.

Capital Economics released a report stating that the Federal Reserve will probably extend the QE3, which will ultimately take the place of the soon-to-expire Operation Twist.

The Fed could decide to purchase $40 billion of longer-term MBS per month in order to tie with its current MBS purchases or increase this rate by $5 billion as recompense for the transactions performed through Operation Twist. Furthermore, the Fed may also double its monthly purchases to $80 billion, says Capital Economics.

In a previous RBS report, statistics demonstrated a persistent increase in streamline refinancing for the Home Affordable Refinance Program (HARP), although the inventory of HARP-eligible borrowers has diminished among the larger lenders.

Hu also added that the increased Fannie Mae issuance may be related to the pricing disparity between the GSE securities, stating, "Since Freddie securities have been traded behind FN securities, lenders may prefer to deliver more loans into Fannie securities, which increased their issuance volumes."