Real Estate News & Commentary

Mortgage Refinances Just Got More Expensive: New Fee Could Cost Homeowners Thousands

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Last week, the director of the Federal Housing Finance Authority made a surprise announcement that affects all refinances. Starting September 1, refinance loans will incur a new loan-level price adjustment. This fee is equal to 0.5% of the loan amount.

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Because the Federal Housing Finance Authority (FHFA) oversees Fannie Mae and Freddie Mac, all conventional loans backed by these two government-sponsored enterprises are adversely affected by this fee.

FHFA Announces New Refinance Fee

FHFA’s director, Mark Calabria, believes in the privatization of all industries and services. He ascribes to a classic Reagan-era doctrine when it comes to Federal Agencies. To privatize Fannie Mae (FNMA) and Freddie Mac (FHLMC), both agencies need a sizable pile of money—significantly more than what they currently have.

Refinances are up over 800% from this time last year due to the historically low-interest rates. Director Calabria does not want the government to do any of the bailing out we saw after the crash in 2008. In order to avoid history repeating itself, he has determined that Fannie and Freddie need to be more financially insulated.

Related: Will Delinquent Loans Drag the Commercial Sector Into Ruin?

Essentially, Calabria capitalized a golden opportunity to increase Fannie and Freddie’s stockpile of cash through the recent boom of refinance transactions.

Since the COVID pandemic hit, the Federal Reserve has been pumping money into the mortgage-backed securities market. Buying up large quantities of mortgage bonds is a common practice known as quantitative easing. The goal is to reduce interest rates and give relief to American homeowners struggling to make ends meet during a financially unsettling time.

But some interpret the new refinance charge, which has been termed an "adverse market refinance fee," as a cash grab. In its announcement, the FHFA stated that the intent is to increase cash reserves ahead of an anticipated downturn in real estate. So, in case of a rise in short sales and foreclosures in 2021, they are stacking money to stay afloat.

Related: Why Fears About Looming Inflation Are NOT Overblown (& a Heckuva Silver Lining for Buy and Hold Investors)

Impact on Mortgage Rates

A direct result of last week’s FHFA decision, interest rates ticked up about 0.25%. Let’s put that in perspective. The same rate lenders may have offered at no points or par (click here for what that means), you would now be paying 0.5% of your loan amount as an added fee for doing a refinance. This occurs because interest rates and fees have a direct relationship.

Aside from costs associated with completing a mortgage transaction, there is a specific cost tied to each interest rate. What lenders do not often tell you is that there are about 20 rate options available for every mortgage product in increments of 0.125%. You can pay tons of money and get the lowest rate on their rate sheet. Alternatively, you could get a significant credit toward transaction-specific costs (appraisal, underwriting, escrow, etc.) by choosing a higher interest rate. It is a sliding scale.

Most consumers end up choosing something close to par, or no points. This means there is no cost or credit to lock-in that specific interest rate. But what was par prior to last week is now a cost of 0.5% of your loan amount, resulting in a higher rate to offer par pricing.

How Did We Get Here?

What they are doing looks like posturing. Fannie Mac and Freddie Mac should be able to stay afloat in case of an economic downturn in real estate values without having to impose this fee.

Earlier this year, with the threat of a massive rise in foreclosures due to COVID-related unemployment, the Federal Government required Fannie and Freddie to publish guidelines on mortgage forbearance. The government also placed a nationwide moratorium on all foreclosures due to a concern rising foreclosures would have on the national economy. Thereby, causing forbearance requests to skyrocket.

Related: Why I’m No Longer Using the BRRRR Method—for Now

When forbearance requests first started, the Federal Reserve looked to the FHFA to help mortgage servicers stay afloat, offering liquidity when needed to shore up losses from forbearance requests. In doing so, they guaranteed mortgage bonds would continue to deliver a yield, which protects their low-risk status to institutional investors, driving more money into the mortgage bond market, pushing interest rates lower and lower.

The idea is that if mortgage bonds stopped performing, they would become a risky investment, making mortgage bond prices drop significantly and causing rates to skyrocket—the very domino effect everyone wanted to avoid.

As director of the FHFA, it seems Mark Calabria did not want to be the piggy bank for mortgage servicers. He didn’t want to dip into the nearly $22 billion in reserves (and that’s just Fannie’s number) to accomplish this, thereby weakening the chances of disconnecting from big brother, the Federal Government. He finally agreed to help—but on his terms, which included additional fees to banks. And those inevitably ended up getting passed on to consumers.

business, accounting, finances and people concept - confused man with calculator at home

From the FHFA’s perspective, there is a trade-off in the market. We have high unemployment, a lot of people not paying their mortgage, and no foreclosures happening. There is artificial stimulation, which is keeping all of this intact—and it comes at a price.

True to form, anything that comes at a price and is related to the government eventually comes out of our pockets.

However, the FHFA is justifying the new fee like this: Mortgage interest rates have been trending downward in the wake of the coronavirus. Lenders have not lowered their rates as much as they could have to match where mortgage bond prices are currently. The reason for this is simple: It would break the banks.

The U.S. financial system does not have enough liquidity to refinance the $11 trillion in outstanding mortgages, nor do they have the manpower. By lowering rates at an incremental pace, they can keep up (albeit barely) with the onslaught of refinance requests hitting lenders daily.

Calabria explained this is the key reason to tack on the new adverse market refinance fee. While it is not good news for homeowners or banks, the market will absorb the fee. Interest rates will likely continue to trend downward. In fact, I’m betting in about a month, rates will probably be back to where they were just before FHFA made this announcement.

Some Banks Likely to Shutter

One last thing to note that showcases the nature of the current leadership within the FHFA is its timing. The timing was not very good from an economic standpoint—and not good in terms of how it affects American Families. But what’s most shocking is that its effective rollout date is unprecedented.

In the past, every time Fannie Mae and Freddie Mac came out with a new fee related to conventional loans, banks had 60-75 days’ notice to start implementing these fees. This time they were given less than 30 days. Most interest rate locks are for 30 days.

The new fee does not just affect homeowners’ finances. It will wipe out nearly 25% of liquidity reserves for most medium- to large-sized mortgage banks, as well. This will likely result in bankruptcy for some smaller mortgage lenders.

Without giving proper notice for banks to absorb this fee, many banks have billion-dollar-plus pipelines of locked loans, which will incur this 0.5% fee. A lot of wholesale mortgage lenders don’t even have 0.5% in margins on their loans, so they will be taking a loss on each loan delivered within this short time frame.

What Americans Should Do Now

Rest assured, we are not powerless. As tax-paying Americans, we can call our representatives and ask for this to be reversed. An action step would be to have congress introduce legislation that would reverse this fee or put a check on the power that the director of the FHFA has to introduce new fees—particularly at a moment’s notice.

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What do you think about this announcement and what do you foresee happening in the coming months as a result? 

Share in the comment section below. 

Robert Ring is a mortgage advisor for CrossCountry Mortgage in Walnut Creek, California. Growing up, he learned a lot from his father, a commercial and r...
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    Ricardo A Perez from Hollywood Florida
    Replied 2 months ago
    @Robert ring thank you for the article good read !
    Robert Ring
    Replied 2 months ago
    My pleasure, thanks Ricardo.
    Evie Olivi
    Replied 2 months ago
    Really good article.
    Robert Ring
    Replied 2 months ago
    Glad you liked it, thank you.
    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied 2 months ago
    A new reason to be glad I rarely use Fannie and Freddie loans. Get creative! Thank you for the article, Robert👍
    Robert Ring
    Replied 2 months ago
    You're welcome, glad you liked it. Thanks.
    Danny Tao Real Estate Agent from San Jose, CA
    Replied 2 months ago
    I'm hoping they would introduce a legislation to stop this. We need to speak voice out too!
    Robert Ring
    Replied 2 months ago
    Me too!
    Lynda Agresti
    Replied 2 months ago
    the 2008 bailout was for the banks not for the ppl. This is a cash grab.. Calabra must be a dem. FH is always looking for extra...we aren't taxed enough evidently....
    Jerome Kaidor Investor from Hayward, California
    Replied 2 months ago
    A Dem? Don't think so. He was the chief Economist for Mike Pence. A member of the Cato Institute. VERY Republican. He's trying to prepare Freddy and Fannie to go private - always a Republican goal.
    Tim Boehm Investor from Tillamook, Oregon
    Replied 2 months ago
    And I think that would be a good idea.
    Page Huyette Real Estate Broker from Bozeman, Montana
    Replied 2 months ago
    Does this go into affect for NEW loans opened after 9/1 or all loans closing after 9/1?
    Robert Ring
    Replied 2 months ago
    This is currently in effect on all loans, the 9/1 date is in regards to delivery to the GSE’s - Fannie Mae & Freddie Mac. If your refinance was locked prior to this announcement (last week), then you may not incur the fee on your loan. But your bank will because delivery of a loan to the GSE’s takes about 10 days once the loan is funded and closed.
    Page Huyette Real Estate Broker from Bozeman, Montana
    Replied 2 months ago
    That doesn't sound right. You either incur the fee or not, you said "may not." Banks, Fannie & Freddie don't work in maybes. Are you saying it may be at the discretion of the bank whether or not they'll pass along the fee? I'll check with a few originators I work with an report back my findings.
    Robert Ring
    Replied 2 months ago
    Hi Page, I'm happy to explain. I think I know wherein the confusion lies. It is up to the bank if they are going to pass on this fee on loans that were locked already prior to this announcement. All loans locked after the announcement made on August 12th incur this fee. However, banks will have to pay this fee on all loans they do not deliver to Fannie Mae and Freddie Mac before September 1st. Delivery date is not funding date, it occurs about 10-14 days after a loan has funded. So your question about the effective date for when the fee will hit consumers, it will hit all consumers who did not have a locked loan before the announcement on August 12th. But it will hit all banks' loans delivered on or after September 1st. Back to your original question, this has nothing to do with when a new loan was opened. It has to do with when it was locked. Additionally, some banks will not be able to cover this fee for their customers who already had locked loans, when the bank can't deliver the loan by the September 1st deadline, in those cases, the bank will issue a change of circumstance disclosure, and add the fee. My company honored all of our locks that were made prior to the August 12th announcement, and in doing so are taking a lose in the neighborhood of 8 figures. We are doing our best to clear out our locked refinance pipelines as quickly as possible to limit the losses that will occur from the loans delivered without the fee being paid by the customer. Let me know if any of that needs further clarification.
    Gene Liang
    Replied 2 months ago
    Refinance loans only.
    Anthony Martukovich Rental Property Investor from Bury St. Edmunds, United Kingdom
    Replied 2 months ago
    Really good information, thanks Robert!
    Robert Ring
    Replied 2 months ago
    My pleasure, thank you Anthony!
    Chris Argudo
    Replied 2 months ago
    Does this also applies to refinancing through VA loan?
    Robert Ring
    Replied 2 months ago
    No, this only affects conventional loans.
    David Stokley Rental Property Investor from Cleveland, OH
    Replied 2 months ago
    Does it affect an FHA refi?
    Robert Ring
    Replied 2 months ago
    No sir.
    David Spear Rental Property Investor from San Diego
    Replied 2 months ago
    What if you already locked a rate and are in the middle of a refi, do you avoid this new fee?
    Robert Ring
    Replied 2 months ago
    Most banks will not hit you with this fee of your loan was locked already.
    Page Huyette Real Estate Broker from Bozeman, Montana
    Replied 2 months ago
    This is a vague answer, I'm checking into current protocol this week.
    Robert Ring
    Replied 2 months ago
    Hi Page, I responded to your other comment above with more detail. My answer is correct, but allow me to clear up any perceived vagueness. Some banks are passing this fee on (or trying - via a change of circumstance disclosure, it may not actually be allowed, but interpretation of this could be vague to some compliance officers) to locked refinance transactions, which were locked prior to the August 12th announcement. The problem is that the FHFA did not give enough notice to banks to properly implement this new fee, thereby exposing large pipelines of locked loans to this fee. As I mentioned in my article, some banks don't even have this much in their corporate margins, so taking this hit is one they cannot afford. To avoid bankruptcy, margin calls, etc, they will need to pass this fee on to any loans that were locked before the announcement on August 12th, which they can't deliver to one of the GSE's by September 1st. David, back to your original question. If you are mid-refinance, and your loan was locked prior to the August 12th announcement, you would know if your lender decided to charge you this fee. They would have to send you a disclosure called a change of circumstance, and you would have to sign it. There are federal laws in place protecting you against certain increases so this would not happen without your knowledge. If you have any trouble, or need further guidance or assistance, you are welcome to message me directly. I will be happy to help in any way I can. I am a licensed lender in the state of CA, my NMLS # is 1034016. My company lends in all 50 states.
    Robert Ring
    Replied 2 months ago
    I noticed one thing I wanted to edit. David, regarding the change of circumstance disclosure I mentioned, if you were presented this you would not HAVE to sign this disclosure, but you would need to if you wanted to move forward with the loan they were offering you, or you could choose to file a complaint with the CFPB (consumer finance protection bureau). Hope that helps.
    LLuvia Jimenez
    Replied 2 months ago
    Good article!
    Robert Ring
    Replied 2 months ago
    Thank you LLuvia!
    Bill F. Rental Property Investor from Boston, MA
    Replied 2 months ago
    Robert, Thanks for taking the time to write that article. You by any chance wouldn't have a job, say as a lender, in which your income will be adversely impacted by this new rule?
    Robert Ring
    Replied 2 months ago
    Hi Bill, thanks for the question and compliment on the article. I am a lender but as I noted in my article, we are 800% busier than this time last year, and I believe the market will absorb this fee. I don’t see an adverse effect on my income personally, however it will effect some banks’ reserves and strength as a result.
    Daniel Clayton
    Replied 2 months ago
    I'm glad i don't have to use traditional banking or soft and hard money loans!
    Emmett Bond Investor from Bellingham, WA
    Replied 2 months ago
    Interesting article. If the Director ultimately succeeds in his plan of privatization of Fannie and Freddie, what impacts would this have on the market and costs to consumers? Seems if they are private and have to “compete” with other lenders and aren’t just the main 2 options for conventional mortgages anymore, the competition of an open market capitalist system would result in rates going down. Not to mention their revenue or bailouts wouldn’t have tax hikes to citizens as a resource. But wonder if there are other downsides I’m missing?
    Robert Ring
    Replied 2 months ago
    This is a great question Emmett. My understanding is that with privatization a few things would occur. One is that we would move away from the government's ability to do what's called quantitative easing, as it relates to mortgages. This is where they buy up mortgage backed securities to artificially lower rates. By not being able to do that, rates would likely increase to a level where private lenders could compete with conventional loans. Right now the mortgage product market is very narrow because lenders in the private sector cannot make much money offering mortgages at rates this low. In doing so, the industry would move towards a risk based pricing model. Where all loans would compete with each other and pricing would be based solely on risk. The higher the risk the higher the rate and cost. Just scratching the surface here, there is a lot to discuss on this topic.
    Kane M.
    Replied 2 months ago
    We are now 5 months into a refi that was supposed to take 60 days due to stupid mistakes by the lender (pulling info based on name instead of SSN and getting wrong person, losing the loan officer and bouncing between new one and manager...). I also asked for a rate lock, but they said it was too unstable. They said that if interest rates went up that they would "make us whole" and when I followed up on what that meant, they said they could adjust closing costs to achieve the same effective rate. Does this article mean that if we don't close the refi by Sept 1, that we will have to pay an additional .5%?
    Robert Ring
    Replied 2 months ago
    Hi Kane, sounds like you’ve got a challenging lender. I’m going to send you a DM with some advice.
    Marcy Morning
    Replied 2 months ago
    Robert, this is an really informative article. Thanks for taking the time to provide the information.
    Robert Ring
    Replied 2 months ago
    My pleasure Marcy, thank you for your comment and for taking time to read it.
    Pam Phillips
    Replied 2 months ago
    @Kane i have no idea who your lender is but time to get a new one.
    Robert Ring
    Replied 2 months ago
    I agree Pam!
    Michael Casile
    Replied 2 months ago
    Very good article, but I guess I see a bit more pro and con to it. Another bail-out would be horrific. While I agree with 80% of what POTUS has done in office, the OmniBus spending bills and the CARES are in the other 20%. This one sounds like, if we can keep politicians hands out of the til ... it might be a good thing for financial stability ... rather than firing up printing presses. Current borrowers are getting artificially low rates ... this fee still leaves them doing quite well on an artificial economic situation.
    Robert Ring
    Replied 2 months ago
    Hi Michael, you touch on some great points. The government has had it's hand in mortgages for too long and it has manipulated the markets and specifically real estate values since the last crash in 2008. Real estate values should be driven up by income increases, instead they've been skyrocketing at an unsustainable pace for over a decade because of an artificially low cost of money. Janet Yellen (former Chair of the Federal Reserve) under Obama is the one who really pushed this. She wanted to keep rates low for a long time, regardless of the consequences. She had a much different mentality than director Calabria does on how the government should be involved in mortgages.
    Jesse Smith Rental Property Investor from Kansas City, MO
    Replied 2 months ago
    Well-written article. I had literally just replied to my lender to lock fantastic rates on my primary and two cash out investment refi's, when this news broke. The lender wrote back a day later, telling me that my new quote on the primary residence would cost an extra 1.09 points and the cash out refi's were gone. Awful, awful timing.
    Robert Ring
    Replied 2 months ago
    Hi Jesse, I'm so sorry to hear that. You're not alone! If you need any help, feel free to message me. My company lends in all 50 states. However, I hope it worked out for you! I think that rates will likely absorb this fee and we will see rates return to where they were prior to this announcement, in not too long.
    David Quinn Investor from Massachusetts
    Replied 2 months ago
    Thank you for the article Robert - very informative.
    Robert Ring
    Replied 2 months ago
    My pleasure David, thank you for your comment!
    John Sharpe from Crestline, California
    Replied 2 months ago
    Let's call it what it really is: a transaction tax Why are they calling it a "fee" and not a brand new tax? Why are we letting them mis-label it as such? Why don't our elected representatives get to vote on this?
    Robert Ring
    Replied 2 months ago
    Hi John, it fell under the category and function of an LLPA, loan level price adjustment. The director of the FHFA is an appointed position. Call your reps on the Federal level. Ask for this to be reversed.
    Steve B. Investor from Centralia, IL
    Replied 2 months ago
    Great article, thanks for taking the time to share
    Matt McGuire Rental Property Investor from Montgomery, TX
    Replied 2 months ago
    Robert, can you expand on what you mean when you say It will wipe out nearly 25% of liquidity reserves for most medium- to large-sized mortgage banks? Is that just because they are going to have to absorb the fee for the loans they currently have locked?
    Robert Ring
    Replied 2 months ago
    Hi Matt, that’s correct. Corporate net profit is less than .5% at a healthy mortgage bank. They didn’t have time to implement this on locks executed before the announcement and delivered to Fannie or Freddie by 9/1. They need about 1 days after funding for delivery. The timing of this is unprecedented and will have a big effect. The rollout could get delayed to give banks more time. There’s some talk about that right now.
    Robert Ring
    Replied 2 months ago
    10* days
    Geoff Neidenbach Investor from Saint Louis, Missouri
    Replied 2 months ago
    Excellent article Robert. I initiated 4 non owner occ refi's last week. I was quoted 3.5% 30 yr fixed. Lender states 90-120 days to close cause of processing backlog. I haven't done a conventional loan in years (always portfolio) so this is an interesting process. Does the rate, days till close sound normal for current circumstances? I very much agree with Michael, these are artificially low rates so I don't really care about an extra fee (that I can expense anyway) when I'm lowering all my rates by 1-1.5 points resulting in over $1500 per month increased cash flow - this is an extremely important aspect of investing we should all be aware of!
    Robert Ring
    Replied 2 months ago
    Hi Geoff, some banks are just really slow right now. I’m a lender and would be happy to assist with a much quicker timeline. We’re a full service mortgage bank. Feel free to reach out via DM.
    Jen Kendall Rental Property Investor from Utah
    Replied 2 months ago
    Excellent and informative article, Robert! Thank you.
    Robert Ring
    Replied 2 months ago
    Thank you Jen!
    Tracy Brown Rental Property Investor from Sacramento, CA
    Replied 2 months ago
    Great article and your clarifying comments on those questions posed. Very educational on some lending basic background knowledge. So, thank you.
    Robert Ring
    Replied 2 months ago
    My pleasure, thank you Tracy!
    Tony Clark
    Replied 2 months ago
    Great article and I appreciate all the details in the follow up!
    Robert Ring
    Replied 2 months ago
    My pleasure Tony, thank you for reading the article!
    Edwin F Zhingri
    Replied 2 months ago
    Great article - thank you very much