Orlando Mortgage Blog

You can bet most people are not aware of this detail...

Quoted from the Fannie Mae "Selling Guide Announcement SEL-2011-14:

"As directed by the Federal Housing Finance Agency (FHFA), pursuant to the Temporary Payroll Tax Cut Continuation Act of 2011. Fannie Mae (and Freddie...I added to the quote for complete input) is required to increase the guaranty fee charged for all mortgages delivered on or after April 1, 2012, by 10 basis points. In order to comply with the Directive, FannieMae (and I assume Freddie) will increase the guaranty fee applicable to loans in MBS pools with issue dates on or after April 1, 2012, by 10 basis points...".

So, that means 10 basis points to the yield. The  Guaranty Fee (Gfee) increase will actually worsen prices for new borrowers by 30 to 80 basis points (bps)* on the note rate because the impact across the various coupon changes daily based on what par is. One or two lenders have started announcing the staggered plan effective dates based on Rate Lock requirements to meet the February 29, 2012 must close by date. Eventually all will have to align with the new guideline and it will happen quickly.

Considering how conservative present conventional loan underwriting guidelines are today this is a good example of closing the the barn door years after the horses ran away. So the increase helps who at this point? Apparently the cash drawer at the GSE's to apparently cover loss reserves from the days they booked what they asked for and now are eating those decisions and policies big time. So it appears the new "well qualified borrower" not only has to jump through the most difficult loops in decades to get approved, but has to help pay for all those who didn't years ago. Sounds about right for D.C. doesn't it?

*Here's the explanation of how a 10 bps yield becomes a 30-80 bps change in "price":

• Securities are in half point increments

• Today it’s basically 3.0%, 3.5%, 4.0% or 4.5% 

• Most loans can fit into the security at or above their note rate (Buy Up) or the security below their note rate (Buy Down)

• “Buy up” – example: putting 3.625% loan into a 4.0% security
• “Buy down” – example: putting that same 3.625% loan into the 3.5% security
• Our Capital Markets teams is making that call (to “buy up” or “buy down”) based on where we get the best return (“best execution”)

• The GFee change is making it so the buy up/buy down options are somewhat diminished, meaning it costs more to put certain note rates in certain securities

• The buy up/buy down factor is generally a multiple of somewhere between 3-8 times the yield change depending on the loan’s note vs. the security price

• Long story short: the 10 bps in yield times the 3-8 multiple for the buy up/buy down factor = 30-80 bps in price