As if there weren’t enough unwanted new realities prompted by the Covid-19 pandemic, bankers and borrowers will have another one to deal with starting Dec. 1 – the Adverse Market Refinance Fee.
Originally set to begin in September but delayed after backlash from mortgage lenders when it was announced in August, the new 0.50% fee will be assessed on refinanced mortgages of more than $125,000 that are bought by Fannie Mae and Freddie Mac.
That means an additional $500 in costs for every $100,000 borrowed, with the money going toward what the Federal Housing Finance Agency says is an estimated $6 billion in projected losses to Fannie Mae and Freddie Mac from pandemic protection programs offered to borrowers.
While it makes sense that Fannie Mae and Freddie Mac would want to recoup some of what they expect to lose from forbearance defaults, foreclosure moratoriums and emergency measures to keep people in their homes, the timing and the amount of the fee are a concern, some bankers say. Homeowners who refinance their mortgage are looking to cut expenses in a tough economy, and the fee could make redoing the loan less advantageous.
“I just think the timing of the whole thing is challenging for a lot of families that are hurting right now,” said Jimmy Kauffman, chief executive officer of Bank of Sun Prairie.
“It’s an unfortunate thing at an unfortunate time,” Kauffman said.
Some banks may try to absorb all or part of the fee. But some already are making plans to pass it along to the borrower, perhaps via a small increase in the interest rate – about one-eighth of a point – for the refinanced mortgage.
With today’s super-low mortgage rates, the fee shouldn’t price a lot of borrowers out of the refinance market, said Eric Witczak, executive vice president of Green Bay-based Nicolet National Bank.
Weekly mortgage rates hit another all-time low as of Oct. 15, at 2.81% with 0.6 points for a 30-year fixed rate term, according to Freddie Mac.
“Rates are still so incredibly low,” Witczak said, noting the new fee already is being built into Nicolet’s pricing. “I don’t think it’s going to have a big effect at all.”
But Witczak also said he thinks the fee should have been 0.12% or 0.13% instead of 0.50%, which would have made it less controversial and probably would have let Fannie Mae and Freddie Mac start collecting it more quickly.
Both Fannie Mae and Freddie Mac, which are government-sponsored enterprises, have been in conservatorship under the Federal Housing Finance Agency since the Great Recession in 2008.
“They’re seeing banks make so much money and, ‘Hey, how do we get a little something?’ I just think 50 bps (basis points) was kind of foolish because it was such a large splash,” Witczak said. “They haven’t made a nickel on it because they’re making it effective December 1.”
Chris Boland, vice president-consumer lending manager for Brookfield-based North Shore Bank, said the Adverse Market Refinance Fee could make mortgage refinancing a little less desirable, but not enough to slow down the refi boom.
“I think given where rates are – they’re pretty attractive right now – I don’t think it’s going to have a direct adverse effect on production at this point.” Boland said.
Boland said each bank is considering for itself what to do, but it’s likely most will pass the fee along to the borrower.
Kauffman said Bank of Sun Prairie hopes to “absorb the fee as much as we can,” but he’s also waiting to see how the industry in general handles it. He said it’s a shame the fee has come along at a time when some homeowners could really use a lower monthly payment but might struggle with the addition of a new fee.
“Right now is a good opportunity where you have families where money is a little tighter than it’s been, and there’s an opportunity for them to refinance and get a lower rate,” he said. “And now you’ve got a $1,000 to $1,400 fee that’s kind of hitting them at a time where it’s tough.”
The Federal Housing Finance Agency stressed that Fannie Mae and Freddie Mac will exempt refinance loans with balances below $125,000, nearly half of which are comprised of lower income borrowers at or below 80% of area median income. Affordable refinance products, Home Ready and Home Possible, are also exempt, the FHFA said.
Heather MacKinnon, vice president – legal of the Wisconsin Bankers Association said bankers know the fee is coming and have had internal discussions about whether to absorb it or pass all or part of it on to borrowers.
“Lenders would also be discussing how the fee will impact their low- and moderate-income borrowers and making plans to ensure they still serve those areas of their marketplace,” she said.
Nicolet’s Witczak said he thinks the fee will continue through all of next year, and maybe longer.
“There is talk of rates that are going to stay in this ridiculously low environment for three-plus years,” he said. “There’ll come a time where the fee most likely would go away just from a competitive standpoint when it does affect the amount of business – or maybe it’s reduced to 25 bps. But I would plan on this for the next couple of years probably.”
Paul Gores is a journalist who covered business news for the Milwaukee Journal Sentinel for 20 years. Have a story idea? Contact him at firstname.lastname@example.org