While g-fee increases will continue nationally, state level g-fee pricing – proposed by the FHFA – will result in an increase in guarantee fees charge for mortgages in Connecticut, Florida, Illinois, New Jersey and New York.
The rise in g-fees in the five states is to cover the higher costs associated with longer mortgage default processes in certain jurisdictions.
As a result, g-fees are expected to rise by at least an additional 30 to 50 basis points to match recent private label execution in 2013, according to Bank of America Merrill Lynch (BAC) analysts.
This is tripled from the previously raised guarantee fees charged to lenders by an average 10 basis points in order encourage private capital to fund the market.
"G-fee increases of greater than 40bp threaten to raise borrowing costs by offsetting any compression in primary-secondary spreads," BofAML states.
In order to "contract" both of Fannie Mae and Freddie Mac footprints in the mortgage market, as well as encourage the return of capital investment, the FHFA aims to increase g-fees gradually.
There are various barriers preventing the deployment of private capital from regulatory uncertain around Qualified Mortgage and Quality Residential Mortgage servicing standards and guidelines.
In order for a scalable private label market to develop, "securitizations need to be competitive to the relative advantage of favorable liquidity, capital treatment and operational efficiencies that GSE securitization continues to enjoy."
If the goal of the FHFA is to revitalize the private label market rather than price GSE credit risk fairly, originators, regulators and issues need to invest more money, effort and time to bridge the gap between the two markets.
"Currently, the GSEs are in the position of playing policeman, jury and judge, creating a push and pull between them and the originators. The existing framework appears onerous at first blush; for example, by lengthening the window for putback claims conditioned on 30-day delinquent status," the report states.
Click the chart to view the hypothetical agency executive of recent non-agency jumbo deal.