Definition of 'Guarantee Fees'
Fees charged by mortgage-backed securities (MBS) providers, 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), but small sub-fees are also deducted to cover internal expenses for such services as:
-Managing and administering the securitized mortgage pools
-Selling the MBS to investors
-Reporting to investors and the SEC
-Maintaining the MBS on the open market, and selling, general and administrative expense
Investopedia explains 'Guarantee Fees'
Commonly known in the industry as "g-fees", this small deduction (the average is 15-25 basis points in relation to the stated coupon rate) allows the corporations selling the MBS to make a profit, while benefiting both mortgage lenders and borrowers by making groups of mortgages more marketable and liquid. This helps bring investor capital into the business, allowing all participants to lower their risk exposure and enabling them to offer mortgages to borrowers of lower credit quality.
The coupon rate on an MBS (also known as the pass-through rate) is the average rate on the underlying mortgages minus the guarantee fees.