Refinancing a mortgage is about to become more expensive – potentially re-adjusting the math for millions of lenders looking for savings amid a historic boom for homeowners.
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On Wednesday night, buyers Fannie Mae and Freddie Mac informed lenders that they, starting in about two weeks, will add a 0.5% fee when buying mortgages for refinancing. Known as an Adverse Market Refinance Fee, the charge is intended to offset the risks and expenses that companies say they have taken over due to the coronavirus pandemic. The cost of the new one will surely be passed on to consumers, whether in the form of higher closing costs or higher mortgage rates, experts say.
Former Federal Housing Administration Commissioner David H. Stevens summed up how people feel about the change in a tweet Wednesday night, writing:
In the midst of a pandemic where some families could be cushioned by simply refinancing their mortgages at a lower rate, FHFA and the GSEs are actually giving them the middle finger to protect investors from billionaire bonds by to add a fee of 50bp on reimbursement. @FHFA
– David H Stevens (@davidhstevens) August 13, 2020
He directed the tweet to the Federal Housing Finance Agency, which governs government-sponsored entities. Fannie and Freddie guarantee vibrations in mortgages for American homeowners. While both are controlled by the federal government, officials have been looking for ways to restore them back to private ownership. (Fannie and Freddie have no comment on Stevens’ tweet.)
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In a statement to Money, a spokeswoman for Fannie Mae wrote: “It is difficult to assess or predict the impact of this unusual event on the company, financial results or financial condition. The compensation is intended to ensure that we are able to maintain market stability in a time of economic uncertainty. ”
In his own statement, CEO Bob Broeksmit, CEO of Mortgage Bankers Association, announced the new fee that the average consumer will pay $ 1400 extra. (Fannie and Freddie estimate that the new fee will pay about 0.1% each year – or $ 100 per $ 100,000 loan – if lenders pass on the full cost.) Though the average closing cost to refinance is about $ 5,000. The charge will take effect on September 1, which means that even applications that have already undergone it are likely to be affected. According to mortgage software company Ellie Mae, the average time to close a refinance was 48 days in June.
“My point is if you look at where rates were in March – 3.5% compared to less than 3% today – even after the fee, you will see a lot of lenders saving money by refinancing,” said Karan Kaul , a senior researcher specializing in home finance at the City Institute, in an interview. “Obviously, the point is they will save less.”
Homeowners who still want to refinance have little choice but to pay. Factors such as how long you plan to stay in your home and your current mortgage rate will determine whether you are better off paying off or paying over the life of your mortgage through higher rates than a mortgage loan. (If you get a choice.) Borrowers with jumbo loans, which Fannie and Freddie cannot buy, will not be affected by this fee. But jumbo loans have become increasingly difficult to obtain due to the pandemic.
The new fee comes amid a refi boom, set off by record low interest rates and the fact that, with COVID disrupting the economy, many Americans are looking for new ways to save. Refinance applications last week accounted for nearly two-thirds of total mortgage applications and posted 12 consecutive weeks of year-over-year growth. At the current average mortgage rate of 2.96%, about $ 18 million could be saved by refinancing, according to real estate data firm Black Knight.
Fannie and Freddie do not lend to consumers. After all, they buy loans from lenders, grab them and then sell the bonds – known as mortgage-backed securities – to investors, and guarantee the loans in case of a default. The largest buyer is the US Federal Reserve, which has purchased $ 40 billion a month in MBS as part of its efforts to support the economy. “This action increases costs and undermines the Federal Reserve’s policy,” Broeksmit notes.
So why did Fannie and Freddie do it? “That’s the million dollar demand,” said Kaul, who learned this morning that the interest rate on his own bank will go up because of the new fee. “It simply came to our notice then. The pandemic has been going on since March. ”
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