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Fannie Mae and Freddie Mac Mortgage Refinances Just Got More Expensive


Way to rain on our parade, Fannie Mae and Freddie Mac.

Just when mortgage rates were hitting record lows, the pair decided to add a new fee to mortgage refinances in light of the ongoing pandemic.

Simply put, they expect more losses related to a higher rate of loan defaults, and are adjusting their pricing accordingly. And refinance rates are higher to begin with so it’s a double-whammy.

Remember, they don’t lend directly, but rather purchase and securitize many of the mortgages that are funded by banks and mortgage lenders.

As such, this new cost will be passed along to you, the consumer.

Introducing the Adverse Market Refinance Fee

  • Fannie Mae and Freddie are charging a new fee to account for higher risk related to COVID-19
  • It applies to all mortgage refinance transactions, including those without cash-out
  • Only exception is certain single-close construction-to-permanent loans
  • The new fee will apply to mortgages with settlement dates on or after September 1st, 2020

On August 12th, both Fannie Mae and Freddie Mac released lender letters discussing a new fee that they’re going to tack onto ALL mortgage refinance loans.

Known as the “Adverse Market Refinance Fee,” it is designed to cover higher costs associated with increased risk thanks to COVID-19.

Instead of absorbing that cost themselves, they’re passing it onto homeowners, even if you don’t actually pose any additional risk to Fannie and Freddie, collectively known as the government-sponsored enterprises (GSEs).

Fannie Mae said the new fee is being charged as a result of “market and economic uncertainty resulting in higher risk and costs incurred by Fannie Mae.”

Meanwhile, Freddie Mac said it “is a result of risk management and loss forecasting precipitated by continued economic and market uncertainty.”

In other words, they expect more of these new refinance loans to sour at some point after origination, despite borrowers likely obtaining lower interest rates and corresponding monthly payments.

Makes sense, right?

How Much More Expensive Will a Mortgage Refinance Be?

  • The Adverse Market Refinance Fee is 50 basis points in price (not rate)
  • This will result in either higher closing costs or a slightly higher mortgage rate
  • Someone with a $300,000 loan amount may have to pay an extra $1,500 in closing costs
  • Or accept a higher mortgage rate to absorb those costs so they aren’t paid out-of-pocket

Fannie Mae and Freddie Mac are tacking on a 50-basis point fee to both no cash-out and cash-out refinance mortgages.

This means rate and term refinances where you don’t actually pull any cash out are subject to the fee, along with cash out refinances.

The new fee is in addition to any other mortgage pricing adjustments that may otherwise apply to your home loan.

On a $300,000 loan amount, we’re talking about another $1,500 in closing costs, which would likely just result in the borrower taking a slightly higher mortgage rate.

For example, if mortgage rates were to stay constant, and the borrower originally qualified for a 30-year fixed at 2.5% with no costs, their new rate might be 2.625% instead.

The good news is that’d only be a difference of about $20 in monthly payment. But it’s still an unwelcome development for those looking to snag the lowest mortgage rates in history.

It applies to mortgages with settlement dates on or after September 1st, 2020. It’s unclear how long they’ll impose this new Adverse Market Refinance Fee.

If you were thinking about refinancing your mortgage, you may want to do it sooner rather than later.

The big question though is how low will mortgage rates go, as I posed yesterday? If they keep falling from here, this new fee can be absorbed via the lower rates available.

So it’s hard to know if this will actually increase borrowing costs once we factor in where mortgage rates are in September and beyond.

They recently pulled back slightly after hitting new record lows, but it could just be a temporary rise before they reach even lower lows.

Note: This doesn’t affect FHA loans, but it often doesn’t make sense to refinance into an FHA loan due to the mandatory mortgage insurance premiums.

Fannie and Freddie CEOs Respond to Criticism

Folks in the industry were none too happy with the announcement, which eventually prompted a joint letter from the CEOs of Fannie Mae and Freddie Mac, Hugh Frater and David Brickman.

The pair attempted to justify the fee, claiming it wouldn’t cause mortgage payments to “go up” because a refinance generally results in a lower interest rate, which in turn reduces the monthly payment.

But that’s kind of like telling someone don’t worry about our cut, you’re still saving money.

Sure, a borrower’s payment may be lower post-refinance, but not as low as it was supposed to be, thanks to subsidizing an adverse market fee they may have nothing to do with.

The CEOs are basically arguing that with mortgage rates at or near record lows, you’re already saving lots of money, so why get upset. Hmm.

Something tells me that’s not going to go over well either.

Update: After mounting pressure, the FHFA has delayed the implementation date of their Adverse Market Refinance Fee until December 1st, 2020.

Additionally, the new fee will not apply to refinance loans with loan amounts below $125,000, Affordable refinance products, Fannie Mae HomeReady loans, and Freddie Mac Home Possible loans.

FHFA Finally Eliminates the Adverse Market Refinance Fee

On July 16th 2021, the FHFA formally announced the elimination of the Adverse Market Refinance Fee, which had been in place for nearly a year.

Mortgage lenders will no longer be required to pay the 50-basis point fee for Fannie Mae and Freddie Mac loan deliveries effective August 1, 2021.

Ultimately, this fee was passed along to consumers, who absorbed the cost via maybe a .125% higher mortgage rate or increased closing costs.

This is yet another win for mortgage rates this summer, which have already been trending lower thanks to COVID-19 resurgence and economic uncertainty.

Somewhat ironically, it comes at a time when COVID cases are on the rise again, prompting a new mask mandate in many parts of California.

The FHFA expects “lenders who were charging borrowers the fee will pass cost savings back to borrowers.”

Let’s hope so!

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