The exchange for the debt economy
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When Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) regulated by the Federal Housing Finance Agency (FHFA), issue securities for mortgage-backed security (MBS) investors, they guarantee repayment of principal and interest to the investors.
To hold that credit risk, which theoretically keeps mortgage rates lower for borrowers by reducing the risk premiums MBS investors might otherwise charge, the GSEs charge mortgage lenders guarantee fees (G-fees), which lenders pass on to borrowers.
The FHFA reported recently that the average guarantee fee of 65.2 basis points (0.652%) charged by Fannie and Freddie on $650 billion of single-family mortgage acquisitions in 2024 was slightly lower than the average fee of 65.5 basis (0.655%) points they charged in 2023.
“This modest change reflected a reduction in upfront fees, partially offset by an increase in ongoing fees,” the report read. “Upfront fees declined due to the Enterprises’ acquisition during 2024 of certain loans with limited guarantee fees designed to support the Enterprises’ housing mission,” a reference to the companies’ previous affordable housing targets.
But the GSEs, on average, recorded negative profitability on the guarantee fees they charged in 2024. Charged as a portion of the total loan amount, guarantee fees represent the main source of revenue for Fannie and Freddie.
The companies’ average profitability gap declined from 2.1 basis points in 2023 to negative 0.6% in 2024, indicating that for Fannie and Freddie’s single-family acquisitions in 2024, “the expected profitability on new loans was below the minimum return on capital threshold.”
The Housing and Economic Recovery Act of 2008 requires FHFA to study guarantee fees on an ongoing basis and report annual findings, which it did in late December.
The FHFA also reports its profitability on guarantee fees across different product segments, loan purposes (purchase or refinance) and risk attributes, such as credit score or loan-to-value (LTV) ratio. FHFA measures the “profitability gap” as the difference between guarantee fees received and the estimated total cost of providing the guarantee.
Average guarantee fees remained constant on 30-year and 15-year fixed-rate products from 2023 to 2024, at 66 basis points and 47 basis points, respectively. Average fees on adjustable rate mortgages (ARMs) rose from 64 to 67 basis points.
Profitability gaps narrowed across all product types, except ARMs, turning negative by one basis point for 30-year fixed-rate loans. The profitability gap for purchase loans worsened from 2023 to 2024, decreasing from negative 0.4 to negative 3.2 basis points.
Average guarantee fees by product type were also largely stable from 2023 to 2024, according to the FHFA, with purchase and rate-and-term refinance loans carrying fees of 63 basis points and 64 basis points, respectively.
Profitability gaps deteriorated across all LTV segments and credit score segments.
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The exchange for the debt economy