The Federal Housing Finance Agency (FHFA) created fury in the mortgage industry this past August when it first announced a 50 basis-point “adverse-market fee” on Fannie Mae- and Freddie Mac-purchased refinance loans. This anger largely died down when the regulator quickly backed away from its original plan to implement the charge in September 2020 and set the new start date on Dec. 1, 2020.
The FHFA introduced the fee as a path to offset an anticipated $6 billion in losses to the thinly capitalized government-sponsored enterprises (GSEs) as a result of federal forbearance programs. Lenders were especially outraged because they had no time to adjust their prices. A September 2020 start date would have forced mortgage companies to eat the difference for any rate-locked loans that were in line to be purchased by Fannie or Freddie.
FHFA’s three-month extension gave lenders time to adjust their rates — and there ended much of the controversy. As Mat Ishbia, president and CEO of United Wholesale Mortgage, pointed out on a company webcast after the FHFA delayed the fee, the Federal Reserve largely created the latest refinancing wave by driving mortgage rates down into the mid- to upper-2% range. The fee, according to Ishbia, merely made an exceptionally good situation for originators “a little worse.”
Many lenders will roll this fee into the loan amount in the form of an 8 to 12 basis-point rate increase. Lenders were expected to begin making the price adjustments this fall to ensure that new refinances have enough lead time to close and be sold to Fannie or Freddie.
The extra expense to the consumer, however, could take some of the steam out of the refinancing boom. This year’s surge in refinances is almost entirely rate-driven, according to Mike Fratantoni, chief economist for the Mortgage Bankers Association (MBA). The margins are so thin, however, that even a small increase in the rate translates to a sizable drop in the number of potential borrowers. According to Black Knight data, the demand for rate-reduction refinances drops significantly as rates approach 4%.
“If you were to look at how many homeowners would benefit from a refinance at a 3% rate versus how many would benefit at a 3.1% rate, it’s about 2 million households,” Fratantoni says. As of this past July, Black Knight estimated that 17.6 million borrowers would benefit from a refinance at 3%. That number dropped to 15.4 million with a rate of 3.125%. And at 4%, the number of prospective borrowers who would have benefited from a refinance this past July dropped to fewer than 5 million.
While 10 basis points may not seem like a lot, it’s enough to really prevent 2 million households from having a benefit to refinance.
—Mike Fratantoni, Chief economist, Mortgage Bankers Association
“For a borrower with a 3.5% rate on their mortgage today, they would have to save half a percentage point to make it worth their while to refinance, given the cost of refinancing and the time to recoup that savings,” Fratantoni says. “So, while 10 basis points may not seem like a lot, it’s enough to really prevent 2 million households from having a benefit to refinance.”
Fratantoni notes, however, that the mortgage industry will see a huge increase in refinances in 2020 even with the 50 basis-point fee in place for GSE loans by the end of the year. As of this past September, MBA estimated that refinances for single-family homes would clock in at $1.75 trillion in 2020, up 94% from the 2019 level of $901 billion. These figures also include other major non-GSE loan programs in which the adverse-market fee does not apply, such as those offered by the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs and U.S. Department of Agriculture.
One issue still rankling critics of the fee, however, is that some of the mortgage industry’s safest borrowers are the ones being charged. The FHFA, for example, exempted the GSEs’ low-downpayment programs designed for first-time homebuyers, as well as lower-balance loans of $125,000 or less, which are mortgages commonly used by lower-income borrowers. Meanwhile, government loan programs, including the typically higher-risk FHA programs, haven’t concurrently raised their mortgage premiums or other funding fees to account for forbearance-related losses.
Mortgage risk hawks, however, support the new fee for GSE refinances. Ed Pinto, co-director of the American Enterprise Institute Housing Center, says that the GSEs’ refinancing activity, in particular, needed to be cooled down. Fannie and Freddie, he says, have been primarily responsible for a recent rise in more risky cash-out refinances. The GSEs also are frequently waiving standard appraisals for cash-out refinances via their automated underwriting technology.
“This tool is embedded in the GSEs’ automated underwriting systems and is subject to gaming,” Pinto says. “We saw this happen with waivers of income documentation back in the [2000s].”
Scott Olson, executive director of the Community Home Lenders Association, has a different take. He argues that the fee wouldn’t have been necessary if the federal government had allowed the GSEs to build capital buffers in preparation for an economic emergency.
“If they had done that, as we proposed, they wouldn’t be having to take these steps, so that’s No. 1,” Olson says. “But, No. 2, given that Congress has already used $3 trillion [in stimulus] to deal with [the economic crisis], it ought to come up with $5 billion, $10 billion to avoid this.” ●