As I mentioned yesterday, Fannie Mae and Freddie Mac imposed a new fee of 1/2 point, or 50 basis points, on all refinance loans – catching the entire mortgage world completely off guard.
What the new fee means in reality is that all refinance borrowers will now face 1/8 to 1/4 percent higher rates when refinancing, as that is how much rates will have to increase to generate enough additional “yield spread premium” (aka commission) to offset the additional/higher fee.
The mortgage world was none too happy about this for a variety of reasons:
- Fannie and Freddie made a combined $4.3 billion in the 2nd quarter of this year alone, so it is not like they are hurting right now;
- this will slow down the refinance process, which is currently a huge boon to our COVID-ravaged economy; and
- b/c this fee increase was unexpected, lenders were not able to account for the extra fee with their rate offerings to consumers and will often have to eat the fee themselves in the short-run (this includes JVM).
Here is a HousingWire article by the former President of the American Bankers Association, Dave Stevens, where he expresses his frustrations (outrage even) in regard to this new fee.
Why are Fannie and Freddie increasing their fees?
But, there is another perspective, as shared by Fannie’s Chief Credit Officer: (1) Fannie & Freddie account for over 90% of America’s cash out refi market; (2) Fannie & Freddie account for 80% of all refinances (cash out and rate and term); (3) refi volumes have doubled since last year; (4) the 1/2 point fee is negligible relative to the full 1% drop in rates we have seen over the last year; (5) the extra fee is necessary to account for the added risk of all these refi’s in a COVID-damaged economy. Fannie and Freddie need these extra fees to build up capital to prepare for an eventual breakoff/split from government control and to ensure there are enough reserves to cover defaults in the event of another mass downturn.
The real story, however, might just be that Fannie and Freddie increased their fees b/c they can – with monopoly pricing power.
They effectively have no competitors offering rates as low as they do right now, so they can increase fees without worrying about losing too much business.
On the one hand, we all should just be very grateful that Fannie and Freddie even exist at all b/c rates are clearly much lower b/c they are in the marketplace.
In addition, without Fannie and Freddie, the mortgage market might have frozen altogether during the peak of the COVID-crisis, as there were very few investors looking to buy mortgages (other than Fannie & Freddie).
On the other hand, Fannie and Freddie enjoy an “implicit government guarantee” for all loans they purchase and securitize and they enjoy preferential status from a tax and regulatory perspective.
In light of this, many industry professionals believe Fannie and Freddie have no right to add any additional fees and their obligation is to offer the lowest rates possible to consumers at all times.
I suspect the real answer lies somewhere in the middle, as is so often the case.
Here are several articles discussing this issue further for those of you looking for more info:
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