Freddie Mac's recent announcement that it is setting the minimum guarantee fee at 16 basis points on new contracts may lead to lower refinancing efficiency, analysts say.
The GSE also announced that it will utilize shorter contract terms going forward to increase flexibility.
Some analysts have indicated that the impact of higher guarantee fees will likely be passed on to consumers through slightly higher mortgage rates. They said that the effect may be as large as five basis points, which may very well lead to lower refinancing efficiency.
Street research has also maintained that the biggest servicers, which also have the most refinancing volume, usually have negotiated the lowest guarantee fees. They are able to push income from guarantee fees down as loans with higher fees are refinanced into loans with lower guarantee fees.
Sources from Freddie stated that the move to impose 16 basis points in guarantee fees would have very minimal impact on consumers because this would not unduly raise their mortgage payment every month.
For instance, officials at Freddie explained that if one looks at a $150,000 loan with a 7% mortgage rate and a 95% loan-to-value, this would only mean about $1.50 payment a month for every basis point in guarantee fees.
Into Fannie Mae's
side of the fence
The imposition of the guarantee fee may also lead to Freddie customers going into the arms of rival Fannie Mae. Traditionally, Fannie has always had the larger share of the market. Analysts said that because of its inability to compete with Fannie, Freddie might have decided to sacrifice volume for more earnings. He also added that Freddie might be hoping that Fannie will follow suit and also impose guarantee fees.
"Freddie has probably decided to trade-off profitability for market share," said an MBS analyst. "Given the volume trend that has historically favored Fannie Mae, Freddie might feel that it does not want to compete for market share anymore."
In fact, the analyst said that when Freddie changed its reporting cycle in the middle of last year to be congruent to that of Fannie, one of the reasons this was done was to try to improve the pricing of Freddies versus Fannies. Before the new reporting cycle was adopted, Golds were trading cheap to Fannies when the different delays were accounted for.
"The accounting change was put in place to make Golds trade more closely to their economic value," said the analyst.
However, even with the change in reporting cycle, Fannies remained to be the benchmark and Freddies have continued to trade at a spread to that.
"It might just be that Freddie is throwing in the towel saying, If we can't compete in market share, let's just boost our profitability,'" he said.