Exactly a year ago to the day, the Federal Housing Finance Agency (FHFA) announced a new refinancing fee that would cost homeowners thousands. It was a surprise announcement by then director Mark Calabria, which would take effect in a loan price adjustment of 0.5% of the loan amount.
Mark Calabria believes in the privatization of industries free from state control. Fannie Mae (FNMA) and Freddie Mac (FHLMC) have been absent since the mortgage rescue package following the 2008 crash that saved FNMA and Freddie Mac from doom and placed them under the supervision of the newly created Federal Housing Finance Administration.
Mark Calabria did not like this and wanted to take the FNMA and FHLMC out of control under this umbrella. To do that, he needed cash, and lots of it. Ahead of the leniency options available to homeowners in 2020, the cash reserves between Fannie and Freddie were nearly $ 30 billion.
Why was the refinancing fee added?
When homeowners began to take advantage of the forbearance options, mortgage servants needed liquidity to fill the payment gap that many mortgages in the United States were missing. Fannie and Freddie had to use their cash reserves to make payments on distressed mortgages so that the underlying bonds would continue to provide a return to the investors who held them.
If the underlying bonds, which securitize residential mortgages in this country, no longer perform, bonds would become a risky investment that would cause their prices to fall sharply due to massive sell-offs. Should that happen, interest rates would skyrocket.
Pressure rose on all sides on Calabria to use the FHFA’s stacks of cash (via Fannie and Freddie) to hold the economy together by helping mortgage service providers keep making their necessary payments on the underlying mortgage-backed securities they serviced. He gave in to the pressure but reached out to America’s homeowners to get the missing money back. This took place in the form of the adverse market refinance fee.
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Was the refinancing fee the right approach?
An interested observer could look at the new refinancing fee in a number of ways.
Some might say it’s a sensible approach to a liquidity crisis sitting on the steps of the FHFA – one that has been making its rounds through hedge funds, agencies, and Fortune 500 companies alike since the beginning of the COVID-19 pandemic. But it could also be seen as a way to fund his vision of Fanny and Freddie’s future – freedom from government oversight. Whichever way you interpret it, it is costing Americans money.
When you take out a mortgage, 64 things can change the interest rate. These are known as LLPAs (Loan Level Price Adjustments). The most common are creditworthiness, mortgage lending value, property type and mortgage purpose (e.g. disbursement or purchase).
For example, let’s say you are offered a 2.75% interest rate on a 30-year fixed-rate mortgage with no points. If this were a refinancing and the Adverse Market Refinance Fee were incurred, 2.75% would no longer be par (no points); it would cost half a point, which is 0.5% of the amount borrowed.
To put this into perspective, every time you take out a mortgage, you can buy down the interest rate from the no-points option. Typically, a half a point fee would lower your interest rate by about 0.25%, so this adverse market refinancing fee increased refinancing rates by about a quarter of a percent.
That made a lot of people angry. While most of the country benefited from lower mortgage rates, spurred by the Federal Reserve to stimulate the economy during troubled times, the FHFA raised rates and marched to the beat of a different drum.
As with Donald Trump’s Consumer Finance Protection Bureau, it was unclear whether the President of the United States had the power to fire the FHFA’s director. In June (Collins vs. Yellen), however, the Supreme Court ruled that the president could dismiss the director of the FHFA at will and not just for cause.
It wasn’t long before Director Calabria submitted his resignation – DC’s formal approach to those who find themselves to the displeasure of the President.
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What’s happening now?
Biden immediately appointed Sandra Thompson as assistant director of the FHFA. In a matter of days, Director Thompson eliminated the Adverse Market Refinance fee. “The COVID-19 pandemic has exacerbated America’s affordable housing crisis financially. The elimination of the Adverse Market Refinance Fee will help families take advantage of the low interest rate environment to save more money, ”said Thompson. “Today’s action supports the FHFA’s priority of supporting affordable housing while protecting the security and solidity of businesses.”
The briefing also noted that mortgage forbearances were below 2%, compared to a high of 5% in May 2020. As such, Director Thompson removed the fee due to a lesser liquidity crisis and continued need.
Bill Dallas, mortgage mogul and current CEO of Finance of America, recently railed against Fannie Mae and Freddie Mac’s prehistoric underwriting policies. To quote an MPA article by David Kitai, “Dallas believes this ‘antiquated’ system persists because agency loans are taken over by the government and subject to fair lending requirements that regulate borrowers through the same funnel.”
He continues, “Homebuyers are entering a challenging and competitive housing market and Dallas believes that the mortgage market is currently unable to empower borrowers who do not fit the strict value parameters of an agency loan.”
Much to the chagrin of the homeowners and loan officers, Director Calabria’s actions were urgently needed and overdue. We haven’t had a director of this agency who has been pushing to get out of the state conservatory administration since it began after the 2008 apartment crash. Placing the agencies under this umbrella creates an unequal playing field in the mortgage sector by favoring low-risk mortgages sold to Fannie Mae and Freddie Mac.
There are many mortgage programs in the market that meet different needs, but the most common ones fall into the square box developed by Fannie Mae and Freddie Mac. By opening up the playing field, you’d see more mortgage options competing on interest rates and terms, expanding the options for unconventional buyers.