The Agency Refinance Fee: Delayed But Not Forgotten

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Rob Chrisman's Perspectives
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Now that the furor has quieted down over the .5 point “adverse market fee” rolled out by FHFA Director Calabria, the industry is left wondering, “What will happen next? Was it the fee that hurt the most, or the way that it was instituted? Will the adverse market fee ever go away after going into effect in December?” Others are asking if the fee really matters, or, like TRID’s implementation that some feared would doom our industry but didn’t, if the .5 loan level price adjustment is just another cost of doing business.

As a reminder, in mid-August and without public warning, Freddie Mac and Fannie Mae (the Government Sponsored Enterprises, or GSEs) issued letters announcing that a 50-basis point loan level price adjustment (LLPA) would be levied on all refinance mortgages they purchase. In their letter, Fannie said that the new fees were necessary and appropriate “in light of market and economic uncertainty resulting in higher risk and costs” that they would incur. The new fee would apply to refinances purchased on or after September 1, 2020. This meant that, for loans in pipeline that could not be delivered and purchased prior to September 1, the new fee would have to be absorbed by the lender, the borrower or both.

As a nation, now is not the time to penalize families who are trying to stay afloat. At a time when the Federal Reserve is purchasing $40 billion in agency mortgage-backed securities per month to help reduce the cost of buying or refinancing a home and stimulate the broader economy, this action by the GSEs raised those costs, contradicting and undermining Fed policy.

Given the outcry from STRATMOR’s clients, the MBA, and thousands of lenders and individuals — and just two weeks after the initial announcement of the adverse market fee — the GSEs agreed to extend the effective date of the AMRF to December 1, 2020.  Also, loans with balances below $125,000 along with loans originated under Fannie’s HomeReady and Freddie’s Home Possible affordable refinance programs aimed at low-income Americans and first-time homeowners are exempt. Lenders cheered the move, which should allow virtually all loans in the pipeline to go through without being impacted by the fee and which effectively stops a huge wealth transfer from any company doing Agency refis.

But delaying the fee doesn’t eliminate the underlying reason it was implemented. The proceeds from the fee, or any other new source of income for Freddie and Fannie, will be used to cover $6 billion in projected losses across the GSEs. Those losses include an estimated $4 billion in loan losses due to projected forbearance defaults, $1 billion in foreclosure moratorium losses and $1 billion in servicer compensation.

STRATMOR analysis done by Dr. Matt Lind confirms that the fee income will provide the GSEs with additional revenue in the $6 billion range. The most recent origination volume forecasts issued by the MBA, Fannie, and Freddie predict refinancing for December 1, 2020 through December 31, 2021 of $1.159 trillion. Sure enough, applying a 50-bps fee to this volume yields an aggregate fee of $5.8 billion.

And let’s not forget that the refinancing fee will generally not cause mortgage payments to go up. The fee applies only to refinancing borrowers, who almost always use a refinancing to lower their monthly rate. If a borrower has a 4.25 percent loan, and can refinance down to 2.875 percent, refinancing them at 3.00 percent will not doom the deal. The fee could, however, shift many borrowers from “in-the-money” to “out-of-the-money” when it comes to the financial attractiveness of refinancing. Put another way, it may not be worth spending thousands of dollars of points and fees to save $120 a month.

At this point, given the delay, some suggest many that portraying the .50 hit to refinances as a serious blow to the housing and mortgage industries (and also the overall economy) is an exaggeration. The reduction in monthly payment savings due to AMRF would be in the $15 per month range off of what the GSEs estimated as a pre-AMRF average payment savings of $133 per month. As we move toward December 1, the 50 bp upfront fee is likely to raise mortgage rates on refinances by only about 10 bp, plus or minus depending on loan amount. Experts believe that we can expect little impact on actual refinance volume.

Funds may be found elsewhere, like second home fees, for example. The agency said the fee would be necessary to help cover projected losses of $6 billion from Fannie Mae and Freddie Mac because of the pandemic, so this may not be the final word in the refi fee saga as the FHFA’s potential COVID-19 losses could grow, depending on the economic landscape. The fee level may prove variable if market conditions change in the coming months, and so could go up if economic conditions warrant it. The GSEs’ goal is to eventually exit conservatorship and seek private capital, so continued or improving revenue is important. The GSEs’ Congressional Charters require expenses to be recovered via income, and no one disagrees that there is a cost associated with the CARES Act and forbearance that must be covered.

The fee was understandable; the process for implementing it was not. For now, lenders and borrowers have some breathing room. Conjecture of a conspiracy has quieted (e.g., do the trade associations look better by delaying or turning a regulatory decision around than by heading it off before it happens?) as the industry remains focused on pushing through as many refinances as possible in the third quarter in a profitable and compliant manner. And when we are confronted by the fee, its impact may actually be minimal.

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