The CEOs of Fannie Mae and Freddie Mac are responding to a massive backlash over an unexpected refinancing fee. In a letter to lenders, they wrote that the uproar was unwarranted, saying it won’t make much of a difference to a homeowner’s monthly payment. And the fee will help the mortgage guarantee companies continue their work of helping others.
If you haven’t heard of the fee yet, it’s a half point surcharge on the cost of a refi that takes effect on September 1st. For the average $280,000 refi, that’s about $1,400 added into the amount that is being financed. Federal Housing Finance Authority, which oversees the GSEs, announced the fee on August 12th. Since then, virtually every housing industry group has come out against it. Even the Trump administration criticized the new fee, and a large contingent of lawmakers have sent a letter to the FHFA asking to cancel this new fee. (1)
Adverse Market Fee
Fannie and Freddie call it an “Adverse Market Fee.” They say they need to impose the fee due to market and economic uncertainty that is creating higher risks and costs. The FHFA says both Fannie and Freddie requested the new fee based on projected losses from the pandemic. They say it only applies to refi’s so it minimized the pain to consumers, in general.
They had originally requested a new fee in March for both new home loans and refi’s, but the FHFA rejected that idea to protect the real estate market during the pandemic. Fannie and Freddie are an integral part of the real estate market because they guarantee home loans for almost half the mortgage market. That amounts to about $5.5 trillion worth of home loans. They buy them from lenders, package them into securities, and sell them to investors with a guarantee.
They’ve also been under government conservatorship since 2008, but have regained profitability and are preparing for an exit. Trouble is, the FHFA wants them to have as much as $240 billion in capital before they are released from government control, and they currently have just $28 billion.
Extra Fee a Burden on Lenders
They say the extra fee will increase the amount they are able to set aside to cover losses that they expect to see in the coming months, but lenders are outraged about the fee, and the unexpected announcement. Many loans are already in the pipeline, so lenders will probably have to cover that expense. One banker told the Wall Street Journal, “For a lot of lenders, that’s more than they make on a loan.” (2)
Teresa Gregory of York Traditions Bank says her bank has about 300 loans in process now. If the average fee is $1,400, the bank will owe close to a half a million dollars to the GSEs. Collectively, the Mortgage Bankers Association says that lenders will owe about $750 million dollars on loans they’ve already locked in. Rates have also edged up in the last few weeks so homeowners trying to refinance are getting a tiny bit of sticker shock. Rates are still low, but the new fee could make or break plans by many homeowners to go through with a refi.
More than three dozen members of the Senate are appealing to the FHFA to cancel this new fee. (3) They fired off a letter to FHFA Director Mark Calabria asking him why he decided to impose this fee on such short notice and why it’s needed. They said that many families are taking advantage of record low mortgage rates to tap the equity in their homes at a time when they need the extra money. They also pointed out that refinancing reduces a homeowner’s debt to income ratio, which reduces the risk to investors, and that a strong housing market has typically led the U.S. out of recession.
Fee Adds $21,000 to a Typical Loan
Fannie and Freddie wrote back that the fee will only reduce the monthly savings of a refi by about $15, but secondary market data company MCTLive! says it’ll cost more like $58 a month or about $21,000 over the life of a typical 30-year loan. In California, the typical loan is more like $400,000 so the new fee could add $30,000 to the overall loan. (4)
MCTLive! COO, Phil Rasori, told the Mortgage Professionals Association, “These FHFA-directed price adjustments do more than work against the hopeful economic rebound and the original agency characters — they undermine trust and spur uncertainty at a crucial time.” He says the end result will be higher costs for all borrowers which will drag on an already dragging economy. (5)
If you want to cozy up to the GSE side of the argument, they say, “This modest fee will help us continue helping those who are really hurting because of the pandemic.”