What is a guarantee fee (g-fee)?

When government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac acquire single-family mortgage loans, they charge lenders a guarantee fee, or g-fee, to cover projected credit losses from customer defaults over the life of the loan, as well as administrative costs and a return on capital.

There are two types of g-fees: An upfront fee, which is a one-time payment made by lenders when they deliver fees to the GSEs; and an ongoing fee, which is collected each month over the life of the loan. Both types are ultimately passed by lenders onto their customers in the form of a slightly higher interest rate on the mortgage.