Homeowners looking to refinance their mortgages could soon have an easier time getting a lower rate, with Fannie Mae and Freddie Mac’s federal regulator eliminating a 50-basis point refinancing fee that was intended to help the mortgage giants cover at least $6 billion in anticipated losses due to the pandemic.
The vast majority of borrowers with mortgages backed by Fannie and Freddie have exited forbearance, and the success of COVID relief programs has “reduced the impact of the pandemic and were effective enough to warrant an early conclusion” of the fee, the Federal Housing Finance Agency said in an announcement.
The FHFA has instructed Fannie and Freddie to stop collecting the fee on loans it purchases or guarantees starting Aug. 1, 2021. FHFA Acting Director Sandra Thomson said the agency expects lenders will pass cost savings along to borrowers.
“The COVID-19 pandemic financially exacerbated America’s affordable housing crisis. Eliminating the Adverse Market Refinance Fee will help families take advantage of the low-rate environment to save more money,” Thompson said in a statement.
Thompson was appointed by the Biden administration as the FHFA’s acting director in June, after a Supreme Court ruling expanded the president’s power to remove the head of the agency without cause. She replaced Mark Calabria, a Trump administration appointee, who resigned after the ruling.
Many lenders were passing the fee — equal to $500 for every $100,000 refinanced — along to borrowers in the form of higher interest rates or up-front fees. For a borrower refinancing a $280,240 mortgage — 80 percent of the median home price in May of $350,300 — the fee totalled about $1,400.
Greg McBride, Bankrate’s chief financial analyst, said cancellation of the fee could be a win for borrowers, but lenders may see it as an opportunity to pad their profit margins, which have been squeezed by low rates and heated competition. That means it’s important to check rates with multiple lenders when looking into refinancing, he said.
“Repealing this ill-conceived and misappropriated fee is a win for borrowers and lenders alike,” McBride said in a statement. “Some of the savings will make it into the pockets of consumers but how much the borrower sees will be dependent on shopping around for the best deal.”
Implementation of the fee, originally scheduled for Sept. 1, 2020, was pushed back last summer to Dec. 1, and borrowers refinancing loan balances less than $125,000 were exempted.
To provide relief during the pandemic, Fannie and Freddie were allowed to offer borrowers forbearance, modify mortgage terms to reduce monthly payments, provide protections for tenants in properties in forbearance, and provide loan processing flexibility.
Last summer, the FHFA said it expected COVID relief programs would cost Fannie and Freddie at least $6 billion, including:
- $4 billion in loan losses due to projected forbearance defaults
- $1 billion in foreclosure moratorium losses
- $1 billion in servicer compensation and other forbearance expenses
But by April, the percentage of single-family mortgages guaranteed by Fannie and Freddie that were in forbearance fell to 2 percent, down from a high of 5 percent in May of 2020.
In its most recent quarterly report to investors, Fannie Mae reported net income of $5 billion during the first three months of 2021, up $4.5 billion from a year ago. Freddie Mac’s net income grew by $2.6 billion over the same period, to $2.8 billion.
“FHFA will continue to monitor the housing finance system, making policy adjustment in coordination with [Fannie Mae and Freddie Mac] as necessary,” the agency said today.