Guarantee Fees: What They Are and How They Work

A guarantee fee (often called a g‑fee) is a charge paid to the issuer or guarantor of a mortgage‑backed security (MBS) or other guaranteed asset. It compensates the guarantor for providing a credit guarantee and for the administrative work required to create, service, report on, and manage the securitized asset. Guarantee fees reduce the risk borne by investors by ensuring principal and interest payments are made even if borrowers default.

Key points

• Guarantee fees are paid to MBS issuers such as Fannie Mae, Freddie Mac, or Ginnie Mae, or to other guarantors for similar services.
• They cover the credit guarantee plus servicing, reporting, and back‑office costs.
• Fees are typically charged as a percentage of the asset (basis points) but can be fixed amounts.
• Lenders may incorporate g‑fees into the mortgage interest rate, so borrowers can pay them over the life of the loan.

How guarantee fees work

1. Mortgage originators (banks, mortgage companies, credit unions) sell individual loans to MBS issuers.
2. The issuer securitizes pools of mortgages and issues MBS to investors.
3. The issuer charges a guarantee fee to buyers of the MBS to insure against borrower default and to cover ongoing administration and reporting.
4. The guarantee fee revenue is intended to cover expected losses across the portfolio and the costs of managing the securities.

Pricing and determinants

Guarantee fees are set based on factors such as:
* Credit quality of the underlying mortgage pool
Loan size and term (e.g., 30‑year fixed)
Market conditions and regulatory requirements

Before the 2007–2009 financial crisis, g‑fees were often modest (roughly 15–25 basis points). After the crisis, fees rose significantly to better reflect true risk; post‑crisis averages are more than double pre‑crisis levels. For example, analyses by regulators have reported average guarantee fees on certain products (such as fixed‑rate 30‑year loans) in the tens of basis points range in recent years.

Historical note and risks

Low g‑fees before the mortgage meltdown contributed to incentives that allowed higher‑risk lending practices to proliferate. Guarantee fees that were too small to reflect actual credit risk meant issuers did not have sufficient buffers for widespread defaults, amplifying systemic losses. Since then, regulators and issuers have adjusted fee levels upward to better account for credit risk and protect taxpayers.

Implications for borrowers and lenders

• Borrowers: Guarantee fees can be reflected in mortgage pricing (interest rates), so changes in g‑fees can influence borrowing costs.
• Lenders and originators: Selling loans to issuers removes loans from balance sheets and frees capital, but the g‑fee impacts the economics of that transaction.
• Investors and taxpayers: Adequate g‑fees are intended to ensure that securities are resilient to defaults and reduce the need for public support.

Conclusion

Guarantee fees are a fundamental component of the mortgage securitization system, funding credit protection and the operational costs of MBS issuance. Their level reflects the perceived credit risk of mortgage pools and has important consequences for mortgage pricing, lender behavior, and systemic stability.

Sources
* Federal Housing Finance Agency (analyses of Fannie Mae and Freddie Mac guarantee fees)
* Public information on Ginnie Mae, Fannie Mae, and Freddie Mac practices