G-fees And The Trump Tax Plan
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By 2011, Americans were still not out of the woods as far as financial forests are concerned. The aftershocks were still rumbling from the global financial crisis. Former President Obama was looking for a way to either get the stuck in the mud economy growing again or win re-election (likely the latter). He then decided to create a temporary tax cut for a 2.0 point tax reduction in payroll (FICA and Medicare) taxes. The cut was funded by the former administration in part by increasing the g-fees charged by Freddie Mac and Fannie Mae (the GSEs) for their mortgage guarantees by 0.1 percentage point. The original payroll tax? Long gone. The g-fee increase? The Trump Tax Plan just extended and increased the tax.
What are ‘Guarantee Fees‘
Mortgage-backed securities (MBS) providers charged fees, such as Freddie Mac and Fannie Mae, to lenders for bundling, servicing, selling and reporting MBS to investors. The main component of the guarantee fee is charged to protect against credit-related losses in the mortgage portfolio (think of it like MBS insurance). Small sub-fees are also deducted to cover internal expenses.
The fee would be in addition to the healthy share of the GSE’s revenues which Treasury collects in the form of dividends each quarter. Freddie and Fannie are both expected to require the first draws on their lines of credit with the Treasury since 2012. The proposed budget envisions collecting $185 billion from them over the next decade. The draw, an anticipated $5.1 billion, will be necessary because the new tax law changes how some of their assets are valued, resulting in a one-time tax hit.
The budget, if passed, would also relieve the GSEs of their obligation to contribute to the trust funds set up to provide money for affordable housing.