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What Credit Risk Transfer Tells Us About G-Fees

Kevin Palmer
The Journal of Structured Finance Fall 2017, 23 (3) 65-69; DOI: https://doi.org/10.3905/jsf.2017.23.3.065
Kevin Palmer
is a senior vice president of single-family portfolio management at Freddie Mac in McLean, VA
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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.

TOPICS: MBS and residential mortgage loans, legal/regulatory/public policy, real estate

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The Journal of Structured Finance: 23 (3)
The Journal of Structured Finance
Vol. 23, Issue 3
Fall 2017
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What Credit Risk Transfer Tells Us About G-Fees
Kevin Palmer
The Journal of Structured Finance Oct 2017, 23 (3) 65-69; DOI: 10.3905/jsf.2017.23.3.065

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What Credit Risk Transfer Tells Us About G-Fees
Kevin Palmer
The Journal of Structured Finance Oct 2017, 23 (3) 65-69; DOI: 10.3905/jsf.2017.23.3.065
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    • GUARANTEE FEES
    • CALCULATING A MARKET-IMPLIED G-FEE
    • G-FEES: COMPARABLE TO THE PRIVATE MARKET BUT MORE STABLE
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