With interest rates hovering around historic lows, a new fee could make it more expensive to refinance your mortgage, experts say.
(ticker: FNMA) and
(FMCC) announced a new 0.5% fee on limited cash-out refinances and cash-out refinances Wednesday night. The fee was introduced “as a result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty,” according to the Freddie Mac bulletin announcing the change.
In statements from Freddie Mac and Fannie Mae, spokespeople said the fee helps provide liquidity and stability in an uncertain market. They also noted that the fee applies to lenders who could choose not to pass it along to borrowers. For lenders who do, they estimate that borrowers will see an impact of about 0.1% annually.
The new cost, referred to as an Adverse Market Refinance Fee, is a fee for mortgage originators selling refinance loans to the government-sponsored enterprises. Lenders, in turn, could pass along the fee to borrowers refinancing with conforming loans, those that adhere to a set of conditions that make them eligible for purchase by the government-sponsored enterprises. In a Wednesday night statement, the Mortgage Bankers Association, a trade group, estimated that the average refinancer would pay $1,400 more than they would have otherwise as a result of the fee.
The trade group released an additional statement condemning the policy on Thursday night as part of a coalition of 20 groups involved with housing and financial services, including the American Bankers Association, the National Association of Home Builders, the National Association of Realtors, and the National Fair Housing Alliance, among others.
“The additional 0.5% fee on Fannie Mae and Freddie Mac refinance mortgages will raise costs for families trying to make ends meet in these challenging times,” the statement said. “In addition, the September 1 effective date means that thousands of borrowers who did not lock in their rates could face unanticipated cost increases just days from closing.”
While the long-term impact of the fee on refinance volume has yet to be seen, Mike Fratantoni, chief economist of the MBA, says the move “is absolutely going to result in a reduction in refinance,” adding that “lenders were changing their prices as soon as the news hit.”
Although the fee will limit the number of people for whom refinancing makes sense, “refinance activity isn’t going to go away completely,” says Zillow economist Matthew Speakman. “There are still going to be people for whom it makes sense to go through the process.”
Keith Gumbinger, vice president of mortgage website HSH, tells Barron’s he doesn’t expect the new fee to dissuade the majority of homeowners considering refinancing. “Collectively, it means that costs for some mortgage borrowers will be a little higher than they otherwise would be, but with mortgage rates already at record lows, it should be fairly painless,” Gumbinger says.
In the short term, the fee could put pressure on lenders, MBA’s Fratantoni says. That’s because lenders will likely cover the cost for borrowers who locked in their rates ahead of the announcement. “What that means from the lenders’ point of view is they’re getting hit by that change in price and so they’re bearing the full cost,” Fratantoni says. “We are hearing from lenders who, as a result of this, they’re going to see losses of millions to, in some cases, tens of millions because this was sprung on them.”
The fee could have varying impact on different kinds lenders, says Henry Coffey, Wedbush’s managing director of equity research covering specialty finance. Large retail originators of Fannie and Freddie loanswill see the biggest impact, while correspondent businesses probably won’t see a large impact, he says.
Shares of several mortgage lenders fell Thursday following the news.
(RKT) ended the day down 6.3%. Flagstar Bancorp (FBC) and
Mr. Cooper Group
(COOP)also dropped, falling 5.3% and 3.5%, respectively.
PennyMac Mortgage Investment Trust
(PMT) ended the day 1.5% lower. The
Dow Jones Industrial Average
fell 0.2% and 0.3%, respectively, on Thursday.
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