In a joint letter released through their companies’ blog sites, the CEOs of Fannie Mae and Freddie Mac discussed their recent announcement on a loan-level price adjustment.
Fannie Mae and Freddie Mac announced Aug. 12 that they would institute a 50-basis-point fee on most refinance transactions beginning Sept. 1.
Fannie CEO Hugh Frater and Freddie CEO David Brickman said in the letter that the “significant discussion” of the fee over the last week raised issues that were too important for them not to address.
They began by stating the charge is a one-time lender charge, and not an increase on the mortgage interest rate.
“Contrary to much of the criticism we have received since making this announcement, this will generally not cause mortgage payments to ‘go up,’ ” the letter stated. “The fee applies only to refinancing borrowers, who almost always use a refinancing to lower their monthly rate.”
The CEOs stated that reports have said the fee could impact borrowers by as much as $1,400, but that estimate was a misrepresentation of how the cost would be applied.
“For an average refinanced mortgage, we estimate a reduction in savings of about $15 per month, meaning refinancing homeowners who were previously saving $133 on their monthly payments will now save $118 per month, on average,” the letter stated. “For borrowers in this scenario, this estimate also assumes lenders pass on the entire fee. That is up to the lenders. If they do not, the $15-per-month figure would go down, potentially to zero.”
As refinances have exploded this year with record-low mortgage rates, the CEOs said some mortgage lenders have posted record high profit margins.
“We believe that given current market conditions, some lenders may choose to absorb the new fee and keep rates unchanged,” the CEOs stated. “Still others may just pass on a portion of the costs. But even if lenders do choose to pass all those costs on to their customers, refinancing homeowners will still be able to save money by taking advantage of historic low interest rates. Moreover, this entire cost may easily be offset by the continued declines in mortgage rates we are generally experiencing.”
In the letter announcing the fee Aug. 12, the agencies said the institution of the fee was not related to whether mortgage companies could afford to absorb some of the cost, but because of risks to the agencies.
“In light of market and economic uncertainty resulting in higher risk and costs incurred by Fannie Mae, we are implementing a new loan-level price adjustment,” the Fannie Mae letter stated.
The CEOs stated that the adjustment was made with homebuyers in mind.
“To ensure we do not impact homebuyers in any way, purchase loans were not included in this action,” the letter stated.
The CEOs also stated that they got approval from the Federal Housing Finance Agency (FHFA) to institute the fee.
“Separately, we each regularly discuss with FHFA our views on risk, pricing, and capital considerations. The approach we announced last week was the product of that process, and focuses particularly on helping to fund our ongoing efforts to support homeowners and renters impacted by COVID-19,” the letter stated. “The fact is we have put in place many policies for mortgages backed by our companies that have provided critical support to homeowners and renters during COVID-19. Fannie Mae and Freddie Mac are willingly absorbing the cost of these activities.”
The letter detailed much of the pandemic work the agencies have done, highlighting the forbearance plans and moratoriums.
“We are proud of this effort. But it has not been costless,” the CEOs stated. “Nor is it complete. While the refinancing market remains strong, there will be delinquencies and defaults that hit companies because of COVID-19. This modest fee will help us continue helping those who are really hurting during the pandemic.”