GSEs' new refi fee will hurt borrowers most
Fannie Mae and Freddie Mac recently announced a surprise 0.5% price hike on most refinance mortgages purchased by the government-sponsored enterprises.
Unfortunately for Americans dealing with the pandemic-induced economic downturn, this misguided rate increase will raise the cost of mortgage credit and hamper efforts to support consumers and the economy.
Announced late Aug. 13 after financial markets closed, and blessed by the Federal Housing Finance Agency, the new “adverse market refinance fee” is designed to shore up the GSEs' finances in preparation for higher defaults and loan losses due to the coronavirus pandemic.
However, the fee increase comes at a significant cost to homeowners at precisely the wrong time.
The new fee is effective for nearly all refinance mortgage loans delivered to the GSEs starting Sept. 1. Meaning, it will apply to anyone who has not yet refinanced their mortgage at current record-low interest rates or locked in their interest rate on pending refinance applications.
Because Fannie Mae and Freddie Mac buy most conventional U.S. mortgage loans — and because 2020 will likely be a $3 trillion mortgage-origination year — the new fee will affect many homeowners now and for years to come.
Applying the fee retroactively also will impose financial losses on lenders already struggling to comply with government-mandated forbearance, loan workouts and modifications on all forms of credit in response to the pandemic. This will pose increased risks to the financial system and to the lenders that have implemented much of the federal relief to support struggling small businesses.
Further, housing is one of the U.S. economy's few bright spots, raising questions over whether it is an “adverse market.” The number of loans in forbearance is declining. And unlike with the housing crisis of 2008, these loans were properly underwritten and should perform better through the current recession.
With Fannie and Freddie returning more than $300 billion to the U.S. Treasury since 2013 and posting $4.3 billion in second-quarter earnings, they hardly need an emergency bake sale to cover their operations.
Defenders of the fee increase argue that it is merely 50 basis points, equating to a $1,400 price hike on a $280,000 mortgage loan, which is the GSE average. But an additional $1,400 is a big deal for U.S. families amid a global pandemic. In real dollars, that amount could otherwise cover up to 10 weeks of groceries, a year of electric bills, an average monthly mortgage payment or several laptops for homeschooling.
Because the new fee will likely be covered by lenders raising the interest rate, the resulting loan payment will be higher than homeowners had originally planned, offsetting much of the savings of refinancing mortgage loans. This will directly affect families' monthly budgets, especially with many dealing with job losses and reduced hours at work. For many Americans, $1,400 means a lot.
Congress and the Trump administration have approved more than $3 trillion in aid to help Americans through the economic crisis, and they are locked in a debate over the next round of support. Now is not the time for one segment of the economy to lay claim to some of that relief.
Fannie, Freddie and the FHFA should immediately rescind this costly and unnecessary tax on U.S. homeowners.