The mortgage refinance market is about to undergo some changes in the coming months, due to the government-sponsored enterprises’ (GSEs) decision to assess a 50-basis point fee for some refinance loans beginning December 1 – and lenders have about three months to prepare for the change.
Seeking to cover at least $6 billion in projected COVID-19 pandemic-related losses, Fannie Mae and Freddie Mac announced on August 12 that they will assess an “adverse market refinance fee” (AMRF) of 50 basis points – or 0.5 percent of the loan amount – for no-cash-out refis and cash-out refis. Refi loans with loan balances below $125,000 are exempt from the fee. Affordable refinance products, Home Ready and Home Possible, are also exempt.
The GSEs’ original announcement set an implementation date of September 1, giving lenders only two weeks to prepare to assess the fee. However, bowing to industry opposition, the Federal Finance Housing Agency (FHFA) stepped in as the GSEs’ regulator and conservator to delay implementation until December 1.
That decision gave lenders three months to prepare to implement the fee and to educate borrowers about how it will impact their refi transactions. Below are three changes lenders can expect to see this fall, along with one less worry that may surprise you.
Reacting to the GSEs’ announcement, the Mortgage Bankers Association (MBA) issued a statement estimating that the fee would cost the average consumer “$1,400 more than they otherwise would have paid,” basing its calculation on the national median home price of $291,300. That figure quickly became the headline-grabbing example many news organizations shared in their coverage of the fee’s impact.
But the announcement created a more immediate concern: “Borrowers moving toward closing with locked rates prior to September 1 would have faced unanticipated cost increases, just a matter of days from closing,” said Christopher Morton, Senior Vice President of Public Affairs for the American Land Title Association (ALTA).
“The simple fact is that additional costs were going to be imposed on consumers during a pandemic, when people are already struggling in a variety of ways with their refinances,” he said.
Preparing for the original September 1 implementation date, many lenders were faced with a decision: Take a half-point hit on every loan that was locked prior to that date, or break the news to consumers about the surprise fee and ask them to pay for it.
“The only way not to absorb it was to look at your borrowers square in the face and say, ‘We know we promised you this price, but we lied.’ Not many lenders were willing to do that, because the vast majority operate with integrity,” said Michael Faraci, Senior Manager of Specialty Products at American Financial Network Inc., one of the fastest direct mortgage bankers in the country. “So lenders were willing to take a half-point hit to their bottom line on every single one of those transactions, which doesn’t sound like a ton. A lot of people can jump to the easy conclusion that we’re in a refi boom, we survived March and April, and now we’re flourishing and on a run of record months, but that half a point quickly adds up to hundreds of millions – possibly billions – of dollars, if you look at industry pipelines.”
Taking to his LinkedIn channel, Kevin Peranio, Partner and Chief Lending Officer at Paramount Residential Mortgage Group (PRMG) Inc., a privately owned mortgage lender that sells directly to Fannie Mae and Ginnie Mae, shared that his company was prepared to absorb $2 million in fees added to loans that locked prior to September 1.
“We had about 700 locks that had that 50-basis point fee,” Kevin said. “That was going to be a real loss for us. I know we’re not the only ones who were going to eat it on the existing pipeline.”
Addressing these concerns in an August 19 blog post, the leaders of Fannie and Freddie stated that “Contrary to much of the criticism we have received since making this announcement, this will generally not cause mortgage payments to ‘go up.’” They also pointed out that some lenders who chose to absorb the fee were enjoying “record high profit margins” due to historically low mortgage rates.
“Some have asserted that this price adjustment could impact borrowers by as much as $1,400 – but this life-of-the-loan estimate is a misrepresentation of how this cost would be applied,” the letter stated. “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. For borrowers in this scenario, this estimate also assumes lenders pass on the entire fee. That is up to the lenders. If they do not, the $15-per-month figure would go down, potentially to $0.”
Now that the implementation delay has granted lenders a reprieve, they are working to clarify what this means for real-world transactions and preparing to educate consumers about the financial impact of the fee. Michael explained that consumers who refi will have a choice: Add the 0.5-percent fee to their closing costs, or carry the fee into their financing. Depending on pricing at the time a consumer locks his interest rate, a half-point fee typically adds about 0.125 percent to 0.25 percent to the rate.
To assess the fee’s potential impact, consider the following scenario:
Joseph Smith has owned his home for three years. He currently pays a 4.5 percent interest rate on his mortgage loan, and his monthly mortgage payment is $1,520. Taking advantage of historically low interest rates, he decides to refi his $300,000 mortgage and considers locking in his rate at 2.5 percent. This would lower his monthly payment to $1,185.
If Joe elects to add the AMRF to his closing costs, he will pay 0.5 percent of $300,000 – a one-time fee of $1,500 – at closing. If Joe decides to roll the fee into his financing, his interest rate will increase by 0.25 percent, making his rate 2.75 percent. His new monthly payment will be $1,225, which is $40 more than what he would have paid per month had he paid the fee upfront, but still considerably less than he is paying under the terms of his current mortgage. If Joe keeps this loan and has 10 years (or 120 months) left in his home before he sells it, and doesn’t refinance again, the amount added to his interest rate will cost him $40 more a month for the remaining 120 months – or a total of $4,800 over the life of his loan.
Ultimately, will Joe’s decision to refinance – even after the AMRF is added – save him money? Yes. The affordability of the fee payment option he selects, however, is a different story, Michael noted.
“Affordability depends on the borrower’s situation,” he said. “Many people like the sound of $40 per month, rather than $1,500 out of pocket – especially because the refi is going to drop their payment anyway. Rates are insanely low right now. People who would have paid 2.5 percent may now pay 2.75 percent, but that doesn’t mean they aren’t still getting a low rate.”
According to Michael, most lenders will need to make changes or enhancements to their point-of-sale or loan origination systems (LOS), as well as their document generation systems, in order to assess and process the fee. However, many lenders already rushed to upgrade their systems when they believed the fee would take effect on September 1, he added.
“Otherwise, there was no easy way in our loan origination systems to apply the fee to loans based on the GSEs’ rule,” Michael said. “You’re talking about maybe 100 manhours for your LOS admins to get it done. It took most of us a few days to get it done, but since the fee takes effect in December anyway, it’s not like anything was lost.”
The AMRF applies to whole loans purchased on or after December 1, and to loans delivered into mortgage-backed security pools with issue dates on or before December 1. For that reason, expect to see lenders set their own implementation dates ahead of December 1, to avoid the headaches the September 1 date would have caused for loans that were locked prior to that date.
“Once it goes effective, it is a super easy change, because you don’t have to affect any loans locked into your pipeline,” he said. “The fee goes onto a rate sheet like a loan-level price adjustment that gets priced into the loan upon initial lock.”
Large depository institutions that write loans out of branch offices will likely put the half-point fee in place by mid-November, while smaller companies that sell loans to wholesalers may set earlier implementation dates.
“The investor you are selling to needs enough time to get the mortgage-backed security issued,” Michael said. “I wouldn’t be surprised if we see effective dates fall in mid-October.”
As the original Sept. 1 implementation date for the AMRF passed, average 30-year, fixed-rate mortgage rates hovered around 2.8 percent. That’s a nearly 50-year low, and with many headlines and mortgage professionals urging consumers to “refinance now to avoid the new fee,” it may seem reasonable to assume that the looming December 1 implementation will drive incoming refi business even more.
But although refi activity has held steady throughout the COVID-19 pandemic, and many lenders have been struggling to keep up with demand, the AMRF shouldn’t impact pipelines or backlogs too much.
“I do think this push to get borrowers to refi before the fee gets put into place will ramp up interest, but it will mostly ramp up apps from people who are on the fence, or maybe thinking of holding off until after the holidays,” Michael said. “You have to remember, we are in our fourth or fifth month of this crazy refi boom. Although it’s tempting to think this is going to continue for a long time, it can’t last forever. It’s not like we have an endless crop of loans that are eligible to be refinanced. So it may prolong the craziness, but not make it crazier.”
Nor should we expect this loan-level price adjustment to remain in place indefinitely, Kevin said. Reminding viewers of his LinkedIn videos that the GSEs instituted a 0.25-percent adverse market fee in 2008 during the financial crisis, he estimates that in order for the GSEs to cover their expected $6 billion in pandemic-related losses, the mortgage industry will need to do $1.3 trillion in refinances.
“We figure that easily, by the end of 2021, this fee should go away,” Kevin said. “This fee is twice as much as the 25-basis point adverse market fee from 2008, which was way worse of a recession than this is. That lasted four years. So we have twice the fee, which we think in half the recession, we should be done in one year.”