New fee on refinancing planned for September
Charge could offset low mortgage rates in midst of recession
In an economy battered by the coronavirus, historically low mortgage rates offered a silver lining. In the midst of a recession, nearly all mortgage borrowers had one thing going for them: They could refinance and save on their monthly payments.
But a surprise announcement late Wednesday from the Federal Housing Finance Agency has reduced the potential savings of a refinance for potentially tens of millions of borrowers. The agency allowed government-sponsored mortgage finance companies Freddie Mac and Fannie Mae to charge a new 0.5 percent refinance fee starting Sept. 1.
The impact is already being felt, some loan originators said, with lenders quoting mortgage rates .013 percent to .05 percent higher Thursday afternoon compared with the afternoon before the announcement. For a $270,000 loan — the size needed for an averagepriced $338,000 Houston home with a 20 percent down payment — that means between $200 and $900 a year in increased interest payments for 30 years.
Bob Broeksmit, CEO of the Mortgage Bankers Association, quickly put out a statement after the announcement was made, urging the Federal Housing Finance Agency to roll back the decision. The association argued that the recent boom in refinances has not only helped homeowners lower monthly payments, but by doing so had also made it less likely that those homeowners would default on their loans, reducing risk to Freddie Mac, Fannie Mae and taxpayers.
“Requiring Fannie Mae and Freddie Mac to charge a 0.5 percent fee on refinance mortgages they purchase will raise interest rates on families trying to make ends meet in these challenging times,” Broeksmit said. “This announcement is bad for our nation’s homeowners and the nascent economic recovery. We strongly urge FHFA, which had to approve this policy, to withdraw this ill-timed, misguided directive.”
Freddie Mac, in a note to loan originators who sell their mortgages to it, said the fee was necessary to offset forecast losses related to COVID-19.
Critics argue the new fee is effectively hijacking customer savings to increase revenues for Freddie Mac and Fannie Mae just as the two companies plan to exit their government conservatorship and reenter the private sector.
Greg McBride, chief financial analyst for consumer finance company Bankrate, believes there’s more at play than Freddie Mac and Fannie Mae suggest, saying the fee “doesn’t pass the smell test.”
“The irony is striking — the Federal Reserve is effectively printing money to buy government-guaranteed mortgage-backed securities in order to keep markets functioning, drive down mortgage rates, facilitate refinancing and put monthly savings into consumers’ pockets,” he said in an email. The
Federal Reserve has bought hundred of billions of dollars in mortgage-backed securities since the pandemic began shaking the economy, a move that it says lowers mortgage rates. “And now FHFA wants to grab that savings from the consumer and put it into Fannie and Freddie’s coffers.”
Fannie Mae and Freddie Mac were private corporations when the Great Recession threw their ability to meet their obligations into doubt. The government stepped in and used taxpayer dollars to keep them afloat — the continued government involvement with Fannie Mae and Freddie Mac was what made it so easy for the federal government to issue a mortgage forbearance program in response to COVID-19.
The government also arranged to be repaid for the bailout through what was known as the net worth sweep — the companies had to pay nearly all their profits to the government. That arrangement was suspended in late 2019 as the Trump administration outlined steps for the two governmentsponsored enterprises to return to the private sector. As a result, they can now build capital to prepare to operate independently of the government.
Tom Rhodes, chief executive of Sente Mortgage, said it is not unusual for Freddie Mac and Fannie Mae to use fees to offset risk. What was unusual about this announcement, he said, was that it gave weeks’ notice instead of months of lead time and that it treats refinances as a greater risk than loans for purchasing new homes.
Many lenders view refinances — especially if they lower a homeowners’ monthly payments — as less risky than a new purchase, since the homeowner has a record of consistently making payments.
“This does not follow the normal pattern,” Rhodes said. “What it does is, very quickly, put dollars into the pockets of Fannie and Freddie, which netted, in the second quarter, billions of dollars.”
The sudden turnaround also puts lenders in a bind, charging them fees on loans that had locked in rates before the announcement was made.
Chad Helmcamp, owner of BWC Lending, called the unexpected fee imposition “a game-changer.”
“For clients who have asked for a refinance quote and haven’t made a decision, it’s going to make an impact for them,” he explained on Thursday. “I won’t be able to deliver the prices that I quoted yesterday.”