Effective Dec. 1, 2020, Fannie Mae and Freddie Mac imposed a 0.5% adverse market fee on all refinance transactions. The fee, which was delayed from its initial start date of Sept. 1, will not affect loans under $125,000.
The 50 basis point fee has been a hot, if not controversial, topic among lenders, causing many to wonder whether this is just an opportunity for a "cash grab" by the government-sponsored enterprises (GSEs). According to Eric Bowlby, CEO of AmeriFirst Financial, the fee is not only warranted, but also necessary to ensure the ability to continue to offer future mortgages.
“When we sell loans on the secondary market, we are paid yield spread premiums as well as service release premiums,” Bowlby says. “Between the bond market and the servicing market, agencies and companies put real money out with the anticipation of holding the loan for four to five years. Whenever a loan is paid off before the four- to five-year time period, then the agencies and companies lose real money. No one can stay in business when they are losing money. The adverse market fee is a hedge against early payoff loans.”
Consumers looking to refinance can expect rates 0.125% to 0.25% higher than a purchase loan interest rate in order for lenders to cover the fee. So far, it hasn’t been much of a deterrent for those looking to refinance their mortgages. “We are passing the cost of the Federal Housing Finance Administration's adverse market fee onto the consumer in the form of a loan level pricing adjustment. So, essentially, it makes their rate higher,” explains Michael Freeman, branch manager at Fairway Independent Mortgage Corp. "Luckily, rates have been so low since the fee started that there hasn’t been any pushback from consumers. We’ll see how long the fee lasts once rates start to rise, but for now, with this market, everyone is happy.”
When Freeman says “everyone is happy,” it’s not limited to those refinancing. The purchase market may also benefit from boosted sales activity as a result of the implemented adverse market fee. For some consumers, the refinance pricing adjustment might be enough of a deterrent to forgo cashing out to remodel their existing homes in favor of buying new instead.
“The [Mortgage Bankers Association] has been a great advocate for our members and our industry to ensure there’s ongoing collaboration with the FHFA and the GSEs to manage risk and affordability for purchase and refinance transactions,” says Ken Bernardo, senior vice president, builder division at Truist. “Rates are still at record lows for consumers to take advantage of the monthly savings in payment whether they’re refinancing their existing home or purchasing a resale or newly built home.”
So what’s in store for 2021? Carry on, carry on.
