If You Snooze, You Lose – Refinances Just Got More Expensive

The Federal Housing Finance Agency surprised the mortgage market yesterday with an announcement of a 0.5% adverse market fee on all refinances.  Citing market conditions and increased risk from COVID-19, Fannie Mae and Freddie Mac, the entities governed by the FHFA, will be adding the 0.5% fee to all refinance loans after September 1st.  Based on an article from Housingwire, Fannie Mae and Freddie Mac requested the fee to offset market risk, uncertainty and expected COVID-19 losses.

Any way that you look at it, this is bad news for homeowners.  For many, this will eliminate the benefit of a refinance, at least for the short-term. For loans in process where an application is submitted to a mortgage lender but the applicant had not yet locked their rate in hopes of further improvement, this additional cost provides a headwind and in some cases an obstacle to completing the process.  For homeowners tapping equity for a home improvement projects or for debt consolidation, the proceeds from the cash out will be reduced.  This can mean a larger loan amount which can, in turn, impact the rate making the loan even more costly.  There is a ray of hope though.

As this move will definitely throw ice-cold water on one of the hottest mortgage markets ever, the Mortgage Bankers Association (MBA) has already begun to appeal the decision.

In their statement, the MBA said:

“Tonight’s announcement by the GSEs flies in the face of the administration’s recent executive actions urging federal agencies to take all measures within their authorities to support struggling homeowners. Requiring Fannie Mae and Freddie Mac to charge a 0.5% fee on refinance mortgages they purchase will raise interest rates on families trying to make ends meet in these challenging times.  This means the average consumer will be paying $1,400 more than they otherwise would have paid.”

So what does this mean to you?

To put this in perspective, this fee is 0.5% or 1/2 of 1% of the loan amount.  On a $200,000 loan, for example, a borrower will now be paying an extra $1,000 in fees to secure the same rate.  Mileage will vary as this amount will be higher or lower based on the actual loan amount, but since this is a percentage of the amount borrowed, refinancing homeowners at the extreme high end of the allowable conventional conforming limit will see the biggest hit.  At that amount, generally $510,400 nationally, a refinancing homeowner will see a whopping $2,552 in additional cost.

What should you do if this could impact you? 

  1. In Process Loans – If you have an in process loan, you need to find out immediately how this impacts you from a cost and benefit analysis.  In some cases, this can radically change the calculus of the deal and the break-even period may no longer be acceptable for the cost.
  2. Locked Loans – If you are locked, do not let your rate expire.  If your lender says jump, you should say how high.  You need to make sure that nothing delays your loan and that you close on time.
  3. Floating Loans – If you are floating your rate, meaning that you have not locked your rate, you need to decide whether to lock or to continue to float in hopes that a rate improvement could offset this fee to get you close to your original pricing expectations.  This does come without risk, so you should have a quality conversation with your lender to make sure that you fully understand the risks and that they fully understand your intent.
  4. Must Refinance Situations Like Divorce – If you are in a must refinance situation such as a divorce, you need to make sure that this added cost is discussed.  In some cases, you may not be able to affect any change to the agreement, but if the terms are still being negotiated, your team should be aware of the added cost.
  5. Considering a Refinance – If you are thinking of refinancing, get your file ready and apply.  This is a hugely fluid market and if you are ready to act when the market changes, you have the best possible opportunity to offset the unexpected.  This is especially true if you are considering a VA or FHA refinance.  These mortgage programs have not been impacted, but they could follow suit.  Waiting could be disastrous.

If you are buying or selling a home, you can breath now as this change does not impact purchases.  Homebuyers and sellers will be largely unaffected and deals in progress will not be imperiled by an added fee that could change an approve to a deny.  Additionally, there is currently no impact on government loans.  As mentioned earlier in this article, VA and FHA transactions are still very viable for homeowners looking to lower their rate and payment.

Purchases and government loans aside, this is no small announcement.  Refinances, as of late, were over 60% of the mortgage market as measured by new originations, so there will be an impact.  Does this, however, mean doom for the mortgage market?  Probably not.  If the forbearance timeline teaches us anything, an edict from Fannie and Freddie can change in an instant, especially when it can have a major impact on an already economically wounded population.  We are also in an election cycle where the incumbent is running on the strength of the economy as a high point and where the housing/mortgage markets are key components of this strength.  There could be great pressure to reverse this fee if it is poorly received.

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