Jottings - GFee Follow - January 6, 2012
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I am starting to see some things dribble in how this will be impacted on mortgage originations. First, Chase is saying any extension as of today that is required, the extension fee will be 25 basis points more than it was yesterday. The agencies however, will only be implementing the fee for loan purchases that will be included in April issue pools and beyond. If this is confusing, give me a call.
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To really understand the pricing impact of this mess, you must understand how the mortgage backed security market works, and the impact of "negotiated" individual guarantee fee with each lender and the agency. Basically, if you have a 4% note rate, this typically will be in a 3.5% mortgage backed pass-through security. In other words, of the 4% interest paid by each borrower, 3.5% will be passed through to the holder of the MBS. The 0.5% of the interest differential is split between the servicer (Wells etc.) and the agency (Fannie or Freddie). If Fannie takes 0.2% for the guarantee fee (the GFee), then the servicer will get 0.3%. It is this 0.3% that the Wells of the world take that they then slice and dice to come up with the price they are going to buy the loan from you. Well, with the infinite wisdom of our benevolent leaders, there is a new slice that has to be given up: The government now will get 0.1%, and the servicer and Fannie will divide the 0.4%. Following this so far? (And you say, no new taxes, right? Ugh!)
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Now the tricky part. The servicers are not going to give up their slice, not for free at least. Fannie is not going to give up her slice, not for free at least. So then what? Numbers will come into play so the borrower will have to pay by an increase in rate. So now, instead of a 4% being originated that goes into a 3.5% MBS, it will be a 4.125% note rate going into an MBS with the excess going to the government. Before this mess (am I saying mess too often? WELL IT IS!) if you delivered a 4.125% into a 3.5% MBS, good ole Fannie would pay you a "buy up" on the excess note rate. This month, that buy up was about 44.25 bp's. 44.25 bp's that was probably being passed to you in price so you could offer that 4.125 rate and still make your profit margin.
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So the moral of this story? To get the tax deduction passed for a mere two months, the good old real estate market that fuels the good old USA economy is going to take it on the chin for the next ten years. And remember, once the government collects something, it is hard to get it back. Anyone hear when the 25 basis point adverse market fee is going to be rescinded? Thought so.
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Questions? Let me know.
Ahhhhh, 'twas ever thus.
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