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The Adverse Market Refi Fee, explained

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By Amy Tankersley

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Amidst rock-bottom mortgage interest rates and a refinance boom that has overwhelmed many banks and lenders – set of course against the backdrop of a global pandemic – government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac on Aug. 12 announced a surprise “Adverse Market Refi Fee” that some estimate could tack on an unexpected $1,400 fee to the average borrower’s refi.

Why are the GSEs assessing this fee? What has been the reaction to this surprise decision? How will the fee impact mortgage lenders and borrowers? To tackle these burning questions, here are our 5 Ws and 1 H about the new fee.

WHAT action have the GSEs taken?

On Aug. 12, the GSEs announced to mortgage lenders the implementation of a new fee that will apply to most refinances.

The so-called “Adverse Market Refinance Fee” (Fannie is also calling it a “Loan-Level Price Adjustment,” while Freddie’s alternative label is a “Market Condition Credit Fee in Price”) will assess a 50-basis point fee for no cash-out refinance mortgages and cash-out refinance mortgages. This means lenders will pay an extra 0.5 percent of the loan amount as a one-time charge.

The GSEs did not include purchase loans in their action, and existing mortgages will not be impacted by the price adjustment, either.

Refi loans with loan balances below $125,000 — nearly half of which are comprised of low-income borrowers at or below 80 percent of area median income — will be exempt from the fee. Affordable refinance products, Home Ready and Home Possible, are also exempt.

Quickly responding to the GSEs’ announcement, the Mortgage Bankers Association (MBA) estimated that the average consumer will pay about $1,400 more for their refi than they otherwise would have paid. That estimate is likely based on current median home prices, which according to the National Association of Realtors (NAR), was $291,300 in the second quarter – so the 0.5-percent fee translates to an average cost of $1,456.

Addressing these concerns, Fannie CEO Hugh R. Frater and Freddie Mac CEO David Brickman on Aug. 19 issued a letter calling those estimates “a misrepresentation of how this cost would be applied.”

“For an average refinanced mortgage, we estimate a reduction in savings of about $15 per month, meaning refinancing homeowners who were previously saving $133 on their monthly payments will now save $118 per month, on average,” they said.

Contrary to much of the criticism we have received since making this announcement, this will generally not cause mortgage payments to ‘go up.’ The fee applies only to refinancing borrowers, who almost always use a refinancing to lower their monthly rate.

WHEN does the new fee take effect?

The fee was originally scheduled to take effect on Sept. 1, but bowing to industry concerns, the FHFA on Aug. 25 directed the GSEs to delay the implementation date to Dec. 1.

The fee will apply to whole loans purchased on or after Dec. 1, and to loans delivered into mortgage-backed security pools with issue dates on or after Dec. 1.

WHY are the GSEs implementing this fee?

This isn’t the first time the GSEs have implemented such a fee. In 2007, Fannie imposed a 0.25-percent surcharge on all mortgages it bought from lenders in response to the looming global financial crisis.

Fannie’s guidance said it is the result of “market and economic uncertainty resulting in higher risk and costs incurred by Fannie.” Freddie attributed the decision to “risk management and loss forecasting precipitated by continued economic and market uncertainty.”

But could the fee actually be related to ongoing efforts to remove the GSEs from government conservatorship? That’s the question asked by many industry trade groups that are critical of the fee – particularly its timing.

Finding that the housing market crash and resulting financial recession damaged the GSEs’ financial condition and left them unable to fulfill their missions without government intervention, the Federal Housing Finance Agency (FHFA) in 2008 established conservatorship of Fannie and Freddie. While the GSEs continue to operate as business corporations, the conservatorship gave the FHFA broad oversight over their decision-making functions, and the GSEs’ boards and management teams must consult with and obtain approval from FHFA on certain matters – such as this new fee.

The conservatorship was never intended to be permanent, and in fact, the FHFA is actively working to strengthen the companies’ balance sheets and release them from government oversight. In June, FHFA Director Mark Calabria announced new liquidity requirements that will require Fannie and Freddie to hold more liquid assets to cover sudden funding shortfalls. Noting that the updated liquidity guidance is more stringent than both their existing liquidity requirements or those of banks and other depository institutions, the GSEs said the FHFA’s actions could result in higher funding costs and lower net interest income, and impact the size and allowable investments in their other portfolios.

The new liquidity requirements  take effect Sept. 1. 

The California Mortgage Bankers Association issued a statement urging Calabria to “immediately reverse this erroneous decision and protect access to affordable credit for all consumers.”

Working to recapitalize the GSEs and remove them from conservatorship is a laudable goal, but it must not come at the expense of the American people during a once-in-a-century health and economic disaster,

the trade group added.

WHERE does the fee go?

In their Aug. 19 follow-up letter, the GSEs’ CEOs stated that the fee will help “fund our ongoing efforts to support homeowners and renters impacted by COVID-19.” They noted that since the World Health Organization declared COVID-19 a pandemic on March 16, they have taken the following actions to help affected homeowners and renters:

  • Suspended single-family foreclosure and eviction actions that were in process prior to the pandemic
  • Halted new foreclosure actions through the end of August
  • Established forbearance programs to enable borrowers to pause or reduce their mortgage payments for up to 12 months
  • Worked with mortgage loan servicers to develop loan modification options and repayment plans
  • Allowed borrowers who return to making monthly payments to repay what they missed when they sell their home or refinance their loan
  • Created new nationwide forbearance programs for landlords of multifamily properties on the condition that they adopt certain tenant protections, including a moratorium on evictions

“This is just a fraction of the actions we have taken in coordination with FHFA to support homeowners and renters. We are proud of this effort. But it has not been costless. Nor is it complete,” the CEOs stated in their letter.”

Fannie Mae and Freddie Mac are willingly absorbing the cost of these activities. While the refinancing market remains strong, there will be delinquencies and defaults that hit companies because of COVID-19. This modest fee will help us continue helping those who are really hurting during the pandemic.

In an update issued Aug. 25, the GSEs said the fee is necessary to cover at least $6 billion in projected COVID-19 losses. These expenses include:

  • $4 billion in loan losses due to projected forbearance defaults
  • $1 billion in foreclosure moratorium losses
  • $1 billion in servicer compensation and other forbearance expenses

HOW have government entities, businesses, and industries affected by the fee reacted to the news?

Reaction was swift and critical. Speaking on a States Title “Ask the Expert” webinar less than 24 hours after the GSEs announced the fee, Chris George, Founder, President and CEO, said “the fee is not good for the industry.”

“It’s not good for a time where people are suffering through a variety of different setbacks associated with the coronavirus,” Chris said. “There’s just no question about that. You’re talking about an implementation of attacks on refinances, which almost makes you wonder if this is some form of risk, an arbitrary change in g-fees). When you raise g-fees, you should reflect real risk. I’m not completely convinced that there is real risk yet, based on the data that we have with regards to the number of forbearances and how many folks are going to be able to afford their payments in the future, as it relates to the continuation of shutdown and a lot of the economy across the United States.”

Not being able to predict how the coronavirus’ spread and impact on the economy is “sort of like driving with your eyes closed, and I wouldn’t recommend doing that,” Chris said.

If you’re going to do it, I would highly recommend you do not jerk the wheel to the left or the right arbitrarily. I would think that driving with your eyes closed, you’re probably better trying to keep the wheel reasonably straight. I think this is one of those arbitrary jerks. I’m not specifically referring to any one individual. I’m talking about the action,

 he joked.

On Aug. 13, a broad coalition of organizations representing the housing, financial services industries – including the MBA, NAR and the American Land Title Association – issued a statement arguing that the fee “will raise costs for families trying to make ends meet in these challenging times.”

“In spite of the fragility of the national economic recovery, the mortgage market has been able to withstand many of the most severe effects of the COVID-19 pandemic. The recent refinance activity has not only helped homeowners lower their monthly payments, but it is also reducing risk to the GSEs and taxpayers.”

At a time when the Federal Reserve is purchasing $40 billion in agency mortgage-backed securities per month to help reduce the cost of buying or refinancing a home and stimulate the broader economy, this action by the GSEs raises those costs, contradicting and undermining Fed policy.

The trade groups urged the FHFA to “withdraw this ill-timed, misguided directive,” and on Aug. 25, the agency directed the GSEs to delay implementation.

Sen. Sherrod Brown (D-Ohio), Ranking Member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs agreed that the fee will hurt families across the country.

“This is what one would expect from Trump’s FHFA director,” Brown said in a statement. “In the middle of the worst economic downturn since the Great Depression, the GSEs and their regulator should be fulfilling their mission to support homeowners and the housing market. Instead, they’re doing just the opposite.”

Adding to industry confusion, the White House issued a statement saying it also has “serious concerns with this action, and is reviewing it.”

“It appears only to help Fannie and Freddie and not the American consumer,” the White House said.

WHO will pay for the fee?

This is perhaps the biggest concern about the fee. Ultimately, the decision is “up to the lenders,” the GSEs’ CEOs said in their letter.

Record low mortgage rates this year have spurred a refinance surge and record high profit margins for some mortgage lenders. We believe that given current market conditions, some lenders may choose to absorb the new fee and keep rates unchanged. Still others may just pass on a portion of the costs.

“But even if lenders do choose to pass all those costs on to their customers, refinancing homeowners will still be able to save money by taking advantage of historic low interest rates. Moreover, this entire cost may easily be offset by the continued declines in mortgage rates we are generally experiencing,” they stated.

As a result, lenders may face millions of dollars in lost profits during a time of great economic uncertainty. An estimated price tag for these losses is yet to be determined.