The housing industry has just over a month to get ready as Federal Housing Finance Agency Director Mark Calabria reiterated last week that Fannie Mae and Freddie Mac will implement a 50-basis-point fee on certain refinances on Dec. 1, 2020.
In August, Fannie and Freddie, the government-sponsored enterprises that back more than two-thirds of all active mortgages, abruptly announced that they were instituting a 0.50% fee on no cash-out and cash-out refinances that settled on or after Sept. 1, 2020.
But after an outcry from the mortgage industry, the FHFA agreed to delay the implementation of the “Adverse Market Refinance Fee” until Dec. 1, 2020.
Speaking last week at the Mortgage Bankers Association Annual Conference, held virtually this year due to the COVID-19 pandemic, Calabria said that the fee will be in place when the calendar flips from November to December.
The 50-basis-point fee could make refinancing more expensive for borrowers if lenders choose to pass the fee along rather than absorb it themselves.
According to Calabria, the fee is necessary to support the GSEs’ bottom line in the face of the numerous pandemic-related losses Fannie and Freddie are facing.
“I am proud of FHFA’s response to this pandemic,” Calabria said last week, per his prepared remarks. “Our actions have helped homeowners, renters, and the housing market deal with this crisis. But they have also come at a cost.”
As the pandemic raged on, the GSEs enacted several policies, including granting mortgage forbearance to borrowers who needed it and placing a moratorium on foreclosures on GSE-owned loans.
Each of those has a cost, according to Calabria.
“The Enterprises estimate that these policies will cost at least $6 billion,” Calabria said. “That is $4 billion in loan losses from projected forbearance defaults, $1 billion in losses from the foreclosure moratorium, and another $1 billion in forbearance expenses. These figures could be even higher depending on the path of the economic recovery.”
In his speech, Calabria said that the fee is a necessary step for the GSEs to take to cover losses from policies that “have helped millions of Americans stay safe in their homes during a global pandemic.”
According to Calabria, neither Fannie nor Freddie received any Congressional funding to offset the cost of the pandemic-driven losses. Therefore, the GSEs must find a source of income to cover the losses due to the way their charters are structured, Calabria said.
“Most financial institutions are required to maintain reserves of loss-absorbing capital exactly for situations like this,” Calabria said. “By contrast, Fannie and Freddie were required for years to send almost every penny of their loss-absorbing capital to the U.S. Treasury.”
Under Calabria’s leadership, the GSEs have begun withholding additional capital in advance of exiting conservatorship, but as Calabria notes, the GSEs do not have enough capital to withstand these losses unscathed.
But the fee doesn’t apply to all loans. According to Calabria, the GSEs have “tailored the fee to ensure low-income borrowers can continue accessing record-low rates to reduce their monthly mortgage payments.”
The regulator previously stated that the GSEs will exempt refinances with loan balances below $125,000 from the refi fee. According to the FHFA, nearly half of those mortgages are comprised of lower income borrowers at or below 80% of area median income.
According to the FHFA, the GSEs’ affordable refinance products, Freddie Mac’s Home Possible and Fannie Mae’s HomeReady programs, will also be exempt from the refi fee.
Initially, the fee was supposed to go into effect on September 1.
The delay to December 1 was a reprieve for a housing industry that was caught almost entirely off-guard by the GSEs earlier announcement.
The fee announcement came amid what will likely end up as a banner year for refinances, thanks to mortgage rates this year falling below 3% for the first time ever.
The initial announcement of the adverse market refinance fee shocked many in the mortgage business as there didn’t appear to be any inkling that any move of this type was coming.
The housing industry reacted both quickly and in force, calling on the GSEs and the FHFA to reverse course on the fee.
The abrupt enactment of the fee even united the country’s two main political parties, with elected officials from both sides joining together to condemn the fee.
Eventually, after nearly two weeks of backlash, the FHFA and the GSEs relented and delayed the fee until December 1.
But, at least based on Calabria’s speech before the MBA conference, there will be no further delay in the fee and it will be in place on December 1.