Coming December 1st, the Federal Housing Finance Agency (FHFA) will be implementing a new Adverse Market Refinance Fee that applies a 50 bps fee to lenders selling any mortgages to Fannie Mae or Freddie Mac. About 50% of all the mortgages in the United States are owned by either Fannie or Freddie. The lenders, in turn, will be passing the fee onto borrowers, which means refinances may be getting more expensive for home-owners.
Here is some key information you need to know if you’re looking to refinance your mortgage in the last quarter of 2020.
Key Items to Know About the New Adverse Market Fee
• The fee increases the cost of refinancing your mortgage if the loan is sold to Fannie Mae or Freddie Mac.
• The fee will be 50 basis points; in other words, 0.5% of your loan amount. The fee will be passed along as a higher interest rate.
• The fee will go into effect on December 1, 2020.
• You’ll be charged based on the delivery date, meaning lenders may start to show the fee in rate sheets in October/November. As of September, we’re already starting to see some lenders incorporate the fee into pricing.
• The fee exempts loans less than $125,000 and affordable (income-based) refinance products, Home Ready and Home Possible.
How Does the Fee Impact Mortgage Refinances?
You still can and should refinance if you can save money on your mortgage. Because the fee is charged based on the delivery date, and most refinances take about two months to close, the 50 bps fee will likely start being applied by lenders in October. But depending on your current mortgage rate, the fee may not change the opportunity to save on a refinance.
What’s the Reason for the Adverse Market Refinance Fee?
The fee is meant to offset the $6 billion in losses Fannie and Freddie have incurred from the high forbearance numbers and increasing default rates during this year’s coronavirus-induced economic slump. But there’s also the money side of things; a 50 bps fee gives Fannie and Freddie – the two corporations in the FHFA – a significantly increased revenue stream. While the messaging from the FHFA indicates the increased revenue is to offset the losses from forbearance, some feel this is an attempt to fast track them to privatization.
There’s also a political angle here. Many politicians in Washington want to see less government involvement in mortgage lending. But from our point of view, that strategy ignores the role the government plays in buying mortgage assets the banks otherwise wouldn’t buy. With just the big private banks as mortgage buyers, we’d almost certainly see higher borrowing costs and less lending overall. As we saw in the 2008 financial crisis, Fannie and Freddie played a critical role as a source of funding, as banks tightened their wallets due to market instability and housing price declines.
Is the Fee Temporary?
In 2010, we saw a similar situation when a 10 bps fee was added to mortgages to fund unemployment insurance extensions. The fee was supposed to fund only a quarter of a year’s worth of insurance extensions. However, that 10 bps fee is still in place today.
All that’s to say, there’s a precedent for “temporary” fees sticking around long-term.
The Bottom Line
Even with the FHFA’s new Adverse Market Fee, you can still save money with a refinance. Make sure you do the right cost analysis on your loan estimate. Talk with a mortgage advisor about getting the right loan for your financial situation. Call or send us a message today.