WASHINGTON — Fannie Mae and Freddie Mac will impose an “adverse market fee” of 0.5% on most refinanced mortgages starting Sept. 1 due to economic uncertainty, a move that the mortgage industry argues could effectively raise monthly mortgage payments for borrowers.
Due to cratering mortgage rates since the onset of the coronavirus pandemic, many homeowners have looked to refinance their mortgage in order to lower their monthly payments. But the forthcoming adverse market fee could effectively raise costs for consumers looking to refinance, to the tune of $1,400 for the average consumer, the Mortgage Bankers Association is estimating.
The new loan-level price adjustment will apply to all refinances. Neither company specified an end date for the fee.
In a letter to lenders, Fannie said it would be implementing the extra fee “in light of market and economic uncertainty resulting in higher risk and costs.”
But the announcement by Fannie and Freddie on Thursday night drew an immediate backlash from the mortgage industry.
“The stated rationale for the loan-level price adjustment increase rings hollow, and at a time when consumers are struggling in the worst economy since the Great Depression, to add what amounts to a $1,400 fee on every refinance is outrageous,” said Robert Broeksmit, the MBA's president and CEO.
The policy resembles a similar fee that the companies implemented during the financial crisis. However, the two situations are somewhat different. The companies imposed the 2008 fee as they faced dramatic losses from the housing crash. Soon after they announced the fee then, the GSEs were placed in government conservatorships, which still exist to this day.
By comparison, today the GSEs already have the financial backing of the U.S. government, and the mortgage sector to date has limited effects from the coronavirus pandemic. The companies' second-quarter earnings were a combined $4.33 billion.
The Federal Housing Finance Agency approved the request from the GSEs to impose the adverse market fee, an agency spokesperson said.
“Based on their projected COVID-related losses, Fannie Mae and Freddie Mac requested, and were granted, permission from FHFA to place an adverse market fee on mortgage refinance acquisitions,” the spokesperson said. “FHFA will continue to ensure that the enterprises fulfill their missions and provide liquidity across the economic cycle.”
Meanwhile, a Fannie spokesperson said the fee "is designed to ensure we are able to maintain market stability during a time of economic uncertainty.”
“Fannie Mae’s current forecasts and expectations relating to the impact of the COVID-19 pandemic are subject to many uncertainties and may change, perhaps substantially," the company's spokesperson said. "It is difficult to assess or predict the impact of this unprecedented event on the company’s business, financial results, or financial condition."
But Broeksmit said the policy contradicts actions the Federal Reserve has taken to stabilize the economy. The Fed is currently purchasing billions of dollars worth of mortgage-backed securities each month in order to ease the flow of credit.
“To have a different arm of the government in FHFA say, ‘We are going to make it more expensive for you to take advantage of these record-low interest rates’ is outrageous and completely at cross purposes with what the Trump administration and the Federal Reserve are trying to accomplish to lift this country out of this economic hole we're in,” Broeksmit said.
The new fee is enough that the Fed should consider abandoning its MBS purchases, said Greg McBride, chief financial analyst at Bankrate.
“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. “And now FHFA wants to grab that savings from the consumer and put it into Fannie and Freddie’s coffers.”
The Community Home Lenders Association also urged Fannie and Freddie to rescind the policy announcement.
"At a time when borrowers are utilizing refinances to strengthen their finances by taking advantage of historically low mortgage rates, now is not the time to raise mortgage rates and costs on working families,” Scott Olson, the group's executive director, said in a statement.
Olson added that the short notice provided by the GSEs for the new policy could create problems for loan locks — pacts between lenders and borrowers to hold an interest rate steady for a certain period of time — and that lenders may have to eat the cost of the fee.
However, in a research note, analysts with Keefe, Bruyette & Woods said the adverse market fee would mean only a modest fee for borrowers.
“Interest rates would rise very modestly, and we would not expect this fee to meaningfully impact refinance volumes,” they said.
McBride disagreed.
“Make no mistake, the consumer is going to end up paying this fee,” he said. “Diluting the benefit of refinancing and discouraging homeowners from doing so during the worst economic downturn in 90 years doesn’t make sense.”
Fannie and Freddie have a limited amount of capital compared with financial institutions of similar size — the mortgage giants are currently only permitted to hold a combined buffer of $45 billion, a cushion that FHFA Director Mark Calabria has warned is too low.
Calabria is seeking to finalize a post-conservatorship capital framework for Fannie and Freddie that would require the GSEs to hold more than five times the amount of their current capital levels.
The FHFA could be concerned about the level of capital at Fannie and Freddie given that the initial mortgage forbearance period is coming to a close and many borrowers will be forced to resume payments, Jaret Seiberg, an analyst with Cowen Washington Research Group, said in a note.
“To us, this only makes sense if FHFA is worried that Fannie and Freddie will see losses spike in the coming quarters as forbearance ends and borrowers have to resume making payments,” Seiberg said. “This could be a way to shore up their capital, which reduces the risk that the enterprises would burn through their limited capital and require taxpayer assistance through the preferred capital lines.”
