Last fall, I wrote a blog post entitled “The Freddie Mac G-Fee Discount: Has the Single Security Eliminated It For Good?“. In the article, I described the history of the single-family guarantee fee (g-fee) charged by the two government-sponsored enterprises (GSEs) of Freddie Mac and Fannie Mae on the single-family loans that lenders sell to the two companies. The loans are then securitized, with the GSEs guaranteeing the credit to the investors in the resulting mortgage-backed securities. Such g-fees comprise the biggest source of revenues to the two companies.

The history was that Freddie Mac averaged a g-fee about 0.05 percent lower than what Fannie Mae charged in the six years ending 2018 (Table 1). This is the Freddie Mac g-fee discount. It has universally been attributed in the industry to the fact that Fannie Mae, as the larger firm, had an advantage where its mortgage securities had greater liquidity so that investors accepted a slightly lower yield. (While Fannie Mae is roughly one and a half times the size of Freddie Mac, its securities are viewed on Wall Street as having something like ten times the trading liquidity.) In order for Freddie Mac to compete, therefore, it had to accept a g-fee that was lower, so that the total interest rate (i.e. the mortgage securities rate plus the g-fee) offered to lenders is the same as Fannie Mae’s; that total rate, after a lender’s markup, is what is charged to homeowners.

Eliminating that discount was a major reason why the Federal Housing Finance Agency (FHFA), the regulator and conservator of the two GSEs, directed the two entities to create a new common securitization platform along with a “single security” where the mortgage securities of the two companies would trade almost as one. The intended result was no discernible difference in liquidity, and therefore no need for a Freddie Mac g-fee discount.

The single security was implemented in June of 2019, and in its first full quarter—July to September of last year—the discount almost entirely disappeared, as highlighted in Table 2. In my article last fall, I concluded by wondering whether or not the discount’s disappearance was permanent, noting that we would have to observe it, quarter by quarter, for a while to confirm that it is.

The results from the second full quarter of the new single security—the fourth quarter of 2019—are now in: not only was there was no discount, there was a 0.01 percent premium! (Also highlighted in Table 2) This was certainly unexpected.

Table 1.
Annual Average Guarantee Fee on New Acquisitions, 2013-2018

Source: Annual and quarterly financial statements of Freddie Mac and Fannie Mae

Table 2.
Quarterly  Average Guarantee Fee on New Acquisitions, 2019

Source: Annual and quarterly financial statements of Freddie Mac and Fannie Mae

That said, just as the 0.01 percent discount in Q3 of last year was not meaningful, so the 0.01 percent premium is not meaningful. This is primarily because there is some noise in how the portion of g-fees that come in the form of upfront payments gets amortized into quarterly calculations (since mortgages have an uncertain maturity).

What is meaningful, however, is that the historic discount has shown itself to have been eliminated for another quarter. This produces savings for the taxpayer since, as Freddie Mac no longer has a reduced g-fee revenue stream, the company will be worth more to the taxpayer by some combination of higher dividend payments made to the Treasury during conservatorship and higher sale proceeds when Treasury eventually sells its large ownership interest in the company. It also makes it easier for lenders to run their businesses, as they can more effectively hedge the interest rate risk on the mortgages which are in the process of being sold to Freddie Mac. Lastly, and perhaps most importantly from a policy perspective, the combined liquidity of both GSEs should make the interest rate on the mortgage securities they issue a bit lower for both companies, which directly translates into a lower interest rate to homeowners on their mortgages.

Thus, one of the major reforms done while the GSEs have been in their unexpectedly long conservatorship is looking very much like a success.