Consumers will have to pay more to refinance their mortgages after Fannie Mae and Freddie Mac announced that they are raising fees for lenders on the loans.
The change is designed to shield the two entities from the additional risk brought on by the coronavirus pandemic. In a letter to lenders, Fannie Mae specifically cited "market and economic uncertainty resulting in higher risk and costs."
The price adjustment adds 0.5% of the loan amount to the consumer's cost. That amounts to $1,400 on the average mortgage originated today. It will begin in September, which means it will basically apply to all refinances that aren't already in process.
The move was met with strong criticism from the mortgage industry, seen as a slap in the face of the one sector of the economy that has been thriving during the pandemic.
"This announcement is bad for our nation's homeowners and the nascent economic recovery," wrote Bob Broeksmit, CEO of the Mortgage Bankers Association, in a statement. "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."
Mortgage refinances have been surging for months, as interest rates continue to set record lows almost weekly.
Borrowers today have a record amount of equity in their homes, due to high home values and a conservative mindset among consumers since the housing crash more than a decade ago. Consumers have been able to not only save on their monthly payments through refinances, but also pull out much-needed cash during these difficult economic times. Banks have also made hefty profits off of all the activity.
Fannie Mae and Freddie Mac don't lend 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 default.
Fannie and Freddie have been highly profitable lately, with a combined second-quarter gain of $4.3 billion, according to earnings statements. The Federal Housing Finance Agency, which regulates both, is in the process of moving them out of their 11-year tenure under government conservatorship, which would require them to raise sizable cash.
The move, however, appears to fly in the face of other actions to help support the housing and mortgage markets.
"At a time when the Federal Reserve is purchasing $40 billion in agency MBS per month to help reduce financing costs for mortgage borrowers to support the broader economy, this action raises those costs and undermines the Federal Reserve's policy," said Broeksmit of the Mortgage Bankers Association.
The added cost could also have political repercussions.
"This is negative for the economic recovery, negative for the housing market," wrote Jaret Seiberg, housing policy analyst at Cowen Washington Research Group. "It also exposes President Trump to charges that he is trying to tax housing at the height of the economic crisis. That is a political liability for the president. We expect Democrats will exploit this."
The bigger concern is whether the move was done because the FHFA is increasingly worried that Fannie Mae and Freddie Mac could face huge losses when the mortgage bailout program ends and borrowers have to start making their payments again. The programs were instituted in April and ballooned to far more borrowers than the FHFA's director, Mark Calabria, originally predicted.
There are currently just under 4 million borrowers in government and private sector mortgage forbearance programs. These allow them to delay their monthly payments for up to a year.
The increase in fees was only levied on mortgage refinances, not on loans used to purchase a home.
"Rates are higher for refinances," noted Matthew Graham, COO of Mortgage News Daily. "FHFA sees that and concludes lenders have money to give on refis. It's a tax based on jealousy, greed, and probably more than a little bit of disdain."