On Friday, President Obama signed into law the Temporary Payroll Tax Cut Continuation Act. This Act uses increased guarantee fees on new mortgages to pay for reduced payroll taxes. The amount of the g-fee increases will be included in future mortgage rates. Below are general provisions pertaining to increasing the Guarantee Fees for Fannie, Freddie, and FHA. Several elements in the bill are not quite clear and may take weeks or months to determine. The primary questions are:
1. How much will the Fannie and Freddie g-fee rise? The Act calls for a minimum increase of 10 basis points, but the amount of the increase is to be determined by FHFA and is supposed to a)”cover the risk of loss associated with the guarantee”, and b) be based on “the cost of capital allocated to similar assets held by other fully private regulated financial institutions”. This definition could result in a wide range of fee increases. The early expectation from insiders is that the increase will be 10 basis points.
2. When will the increase become effective? The Act says the increase is to be applied to guarantees issued after enactment of this section. The date this provision is to be enacted is not clear. FHFA and the GSEs will require substantial effort to prepare for this, so it may take some time.
3. Will the increase in guarantee fees hit all at once? The Act says the FHFA may phase in the increase over a two-year period. This could make the initial effect on mortgage rates fairly small. However, the FHFA could make the increase applicable all at once.
4. How much will the FHA’s annual insurance premium increase? This is the only easy question. The answer is 10 basis points.
5. When will the FHA increase take effect? The bill allows HUD to phase it in over two years following enactment of this subsection. Again, the date of enactment is not clear and the pace at which it is phased in is as HUD deems appropriate.