Abstract
The appropriate level of guarantee fees (G-fees) is an important issue to the housing finance policy community. With the significant amount of risk now being transferred to the private markets through single-family credit risk transfer (CRT), we have another tool with which to estimate the cost of the credit risk and calculate a market-implied G-fee. The market-implied G-fee provides information about what the private capital markets would charge for operating a credit guarantee business like Freddie Mac’s and offers a key benchmark for policy discussions. CRT tells us that Freddie Mac’s G-fees are in line with what the private market would charge for the mortgage credit risk we take, although to a lesser extent for higher-risk loans. Moreover, CRT also indicates that Freddie Mac’s G-fees are more stable than private sector pricing, thus validating conventional wisdom on the issue.
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