According to an article written by Vickie Elmer and published on March 1, 2012 in the New York Times, the hidden guarantee fee of your home mortgage will rise in spring, and other increases will likely take place later this year and next.
What is a guarantee fee? Inside the interest rate quoted on your home mortgage there is a small hidden fee that does not show up in borrowers’ mortgage documents or good-faith estimates, and it is little known outside the industry. According to a Fannie Mae spokesman, the fee “gets incorporated into the underlying rate the borrower pays.” Government-sponsored entities like Fannie Mae and Freddie Mac has been charging this fee for more than three decades.
Congress has mandated an increase in the guarantee fee (included in the two-month extension of the payroll tax reduction last December). On April 1, the guarantee fee will rise 10 basis points or 0.1% (a basis point is equal to one one-hundredth of 1 percent, or 0.01 percent).
An interest rate is usually made of up three parts: the largest goes to the bank or the investors who buy the loan; the smaller portion is for the mortgage servicers that collect monthly payments; and then there’s the guarantee fee. Fannie and Freddie charge guarantee fees as a form of insurance against default for the loans they acquire and resell to investors. The fees also provide a primary source of revenue for Fannie Mae and Freddie Mac. Both organizations started raising fee rates in 2008 during the housing crisis, as foreclosure costs rose. Fannie, for instance, made $5.6 billion in single-family guarantee-fee income in the first nine months of 2011, a 4.7 percent increase from the 2010 period, according to its quarterly financial statements.
Based on the most recent period for which data is available, Fannie Mae charged a guarantee fee of 31.1 basis points, on average, in the third quarter of 2011, for new single-family loans it acquired. That is six points higher than in the third quarter of 2010. Rates on multifamily loans are 15 to 20 basis points higher than on single-families.
Although set to rise on April 1, loans with interest-rate locks from the last 45 or 60 days already have the higher guarantee fee written into them, according to Tom Kelly, the president of Investors Home Mortgage, a division of Investors Bank in Short Hills, N.J. Lenders say they need the extra lead time because it may take time to close the loan, package it and send it on to Fannie or Freddie.
One way to avoid the guarantee fee is to use a lender that does not sell off its loans – for instance, a community bank or a credit union.
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