Signage will be posted outside Freddie Mac’s headquarters in McLean, Virginia, USA on Tuesday, October 1, 2019.
Andrew Harrer | Bloomberg | Getty Images
Consumers will have to pay more to refinance their mortgages after Fannie Mae and Freddie Mac announced they were charging lenders for the loans.
The change is designed to protect the two companies from the added risk posed by the coronavirus pandemic. In a letter to the lenders, Fannie Mae specifically cited “market and economic uncertainties that lead to higher risks and costs”
The price adjustment increases the consumer’s cost by 0.5% of the loan amount. That’s $ 1,400 for the average mortgage taken out today. It will start in September, which means that it will basically apply to all refinancing that is not yet in process.
The move was heavily criticized by the mortgage industry in what was seen as a blow to the one industry that thrived during the pandemic.
“This announcement is bad for our country’s homeowners and the looming economic recovery,” wrote Bob Broeksmit, CEO of the Mortgage Bankers Association, in a statement. “When Fannie Mae and Freddie Mac have to charge a 0.5% fee on the refinance mortgages they buy, interest rates go up for families who want to make ends meet during these challenging times.”
Mortgage refinancing has been rising for months as interest rates hit new record lows almost weekly.
Borrowers now have a record amount of equity in their homes, thanks to high property values and conservative consumer attitudes since the property crash over a decade ago. During these tough economic times, consumers were not only able to save their monthly payments by refinancing, but also withdraw much-needed cash. The banks have also made substantial profits with all of the activities.
Fannie Mae and Freddie Mac do not lend loans to consumers, but they buy the loans from lenders and package them into securities that are then sold to investors. They then guarantee the principal and interest on the loans in the event of a default.
Fannie and Freddie have been highly profitable lately, with combined earnings of $ 4.3 billion in the second quarter. The Federal Housing Finance Agency, which regulates both, is in the process of getting them out of their 11-year tenure under state oversight, which would force them to raise substantial cash.
However, the move appears to be flying in the face of other measures to support the real estate and mortgage markets.
“At a time when the Federal Reserve is buying $ 40 billion a month from MBS agencies to cut mortgage borrowing costs to support the wider economy, this move is adding to that cost and undermining Federal Reserve policies,” Broeksmit said from the Mortgage Bankers Association.
The additional costs could also have political implications.
“This is negative for economic recovery and negative for real estate,” wrote Jaret Seiberg, housing policy analyst for the Cowen Washington Research Group. “It also exposes President Trump to attempting to tax housing at the height of the economic crisis. That is a political obligation for the President. We expect the Democrats to take advantage of this.”
The bigger concern is whether the move was taken because the FHFA increasingly fears that if the mortgage bailout program ends and borrowers have to make their payments again, Fannie Mae and Freddie Mac could suffer huge losses. The programs launched back in April and went to far more borrowers than FHFA director Mark Calabria originally predicted.
There are currently close to 4 million borrowers in government and private mortgage forbearance programs. This allows them to delay their monthly payments by up to a year.
The fee increase was only applied to mortgage refinancing, not loans used to purchase a home.
“Refinance rates are higher,” said Matthew Graham, COO of Mortgage News Daily. “The FHFA sees this and concludes that lenders have money to pay for refis. It’s a tax based on jealousy, greed, and probably more than a little bit of contempt.”