The narrowing gap between what large and small lenders pay in guarantee fees to Fannie Mae and Freddie Mac has helped the industry's smallest originators grow their share of mortgages sold to the government-sponsored enterprises.
G-fees on Fannie and Freddie loans have increased 250% since 2009, with fees averaging 58 basis points in 2014, up from an average of 22 basis points in 2009, according to a new report by the Federal Housing Finance Agency. But during that period, the gap between what small lenders paid in G-fees compared to larger lenders has swung to the point where the pricing advantage is now on the small lender side.
On an equivalent, risk-adjusted basis, "small lenders paid slightly less to guarantee a loan in 2013 and 2014 than did large lenders," according to the
As a result, the percentage of loans purchased from extra-small lenders (those outside the top 100 in volume sold to the GSEs) has grown from a mere 8% in both 2010 and 2011 to 28% in 2014. Meanwhile, the share of loans purchased from the GSEs' five largest lender sellers fell from 60% in 2010 to 39% in 2014.
The newfound parity in G-fee pricing has made a big difference for small lenders, according to Glen Corso, executive director of Community Mortgage Lenders of America, a trade group representing small banks and nonbank lenders.
"Five years ago, the big lenders had a significant pricing advantage over the smaller lenders because of the differential in fees," he said. "As a result, lenders sold their loans to large aggregators because they got a better price than what they could get from Fannie and Freddie directly."
Now, small lenders have a choice. "They can sell directly to Fannie and Freddie and retain the servicing," Corso said. If they want to sell the loan servicing released, he said, they will generally to turn to the large aggregators.
The pricing of servicing is really the key to whether a small lender sells a loan to one of the GSEs or an aggregator like Wells Fargo or JPMorgan Chase, said David Zugheri, a co-founder and part owner of Envoy Mortgage who recently stepped back from day-to-day operations at the Houston-based nondepository mortgage bank. Envoy has an approximately $2 billion servicing portfolio.
A 10-basis point difference in the guarantee fee pales in comparison with the price of servicing, which is about a 25% of the value of a mortgage, he explained. So if a large correspondent aggregator like Wells or Chase raises its servicing price, "we would be fools to sell to anyone but Chase," Zugheri said.
Following a review of its G-fee policies completed in April, the FHFA maintained the general level of fees charged, but made "minor and targeted" adjustments to the fee structure that will take effect Sept. 1.
"Overall, the set of modest changes to guarantee fees is roughly revenue neutral and will result in little or no change for most borrowers," the FHFA said in its report.
The report also details how the level of G-fee increases varies by loan type, as the FHFA attempts to normalize the differences in profitability between mortgage products.
For example, the G-fees increases on 30-year fixed-rate mortgages have been higher than the increases on 15-year fixed-rate mortgages, which has narrowed the gap in profitability between the two products — though "15-year loans remained slightly more profitable for the Enterprises than guaranteeing 30-year loans," reads the report.
In addition, G-fees on cash-out refinances jumped 10 basis points from 2013 to 63 basis points in 2014. The G-fee on rate-term refinances hit 53 basis points in 2014, up 5 basis points from the prior year, and the G-fee on purchase loans rose just 3 basis points to 58 basis points.
