Last week the Senate passed a payroll tax compromise (H.R. 3630) containing a provision to raise GSE and Federal Housing Administration (FHA) guarantee fees by 10 basis points on new originations.
According to a report released today by JPMorgan Securities, it is now unclear if some version of the bill will make it through the House (see related ASR sister publication's National Mortgage News story titled House Kills Senate Payroll Tax Measure Which Includes G-Fee Hikes published on structuredfinancenews.com).
But, while analysts said there exists considerable disagreement among lawmakers on how to pay for this cut, the g-fee provision seems to have support from both parties.
In the future, analysts said that if such a policy is passed, it can mean more g-fee increases if the government wants to use the revenue from Fannie Mae and Freddie Mac to fund other programs.
The revenue raised by the GSEs would be transferred directly to the U.S. Treasury and not be deemed as a reimbursement to the government for the costs or subsidy offered to an enterprise.
Meanwhile, JPMorgan analysts stated that the FHA fee revenues will probably be used to fund the FHA itself. The Congressional Budget Office projected that the rise in GSE g-fees would increase by $35.7 billion in the next ten years.
JPMorgan analysts think that this estimated revenue is accurate. For instance, they said that assuming just below $1300 billion in agency MBS issuance for next and taking in declining gross issuance over time, the g-fee rise can raise $35 billion over 10 years. Most of which will be directed from the GSEs to the Treasury.
Analysts think that any g-fee increase can ultimately be passed on to borrowers in terms of higher rates. This will therefore increase the cost of new loans and negatively affect housing, analysts said. But, this policy comes after the implementation of the Home Affordable Refinance Program or HARP 2.0, which is aimed at reducing borrowers’ costs by limiting upfront fees, among other things.
From a securities perspective, the g-fee rise will moderately drive up refinancing costs and effectively reduce the incentive that borrowers now have by 10 basis points, analysts said.
This ‘elbow’ shift, they said, will have the most impact on 4s, 4.5s, and 5s. The model price effect is roughly eight or nine ticks on these coupons, although practically analysts expected the market to price in only roughly half of this. This is based on specified pool payups versus theoretical payups. This policy, if implemented, should be most impactful for the middle of the stack or 4s through 5s. It might also increase prices by roughly four ticks, with the wings of the stack gaining approximately one to two ticks, JPMorgan said.