With all of the current public discourse about the COVID-19 pandemic, social justice, the upcoming election, and yes, the (possible) start of a new football season, some may have missed another important announcement that may have widespread impact during the continued economic downturn.
On August 12, 2020, the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) delivered a harsh blow to lenders and consumers in the residential mortgage market when they announced they would impose a .5% fee (i.e., a 1/2 “point” in mortgage finance parlance) on refinance mortgages purchased by Fannie Mae1; and Freddie Mac2 after September 1, 2020. The increase is being justified as a response to “COVID-19 related economic and market uncertainty.”
Fannie Mae and Freddie Mac are Government-sponsored Enterprises (“GSEs”) regulated by the Federal Housing Finance Agency, and they play a critical role in the American residential mortgage market. They guarantee and purchase residential mortgage loans from lenders of all sizes (providing important cash flow to those lenders), then package and slice the pool of loans into securities sold to investors on a secondary market. The GSEs’ rules functionally set the standards for residential mortgage lending by sheer volume: Fannie Mae has approximately $3.5 trillion in mortgage loan assets, and Freddie Mac has approximately $2.1 trillion in such assets. Together, they are the holders of about half of the conventional residential mortgages across the country.
The new fee – which has been referred to as an “Adverse Market Refinance Fee” or a “loan-level price adjustment” – will apply to cash-out and no cash-out refinance mortgages except for certain construction conversion mortgages. Importantly, the fee does not apply to purchase-money mortgages. Freddie Mac describes the effective date of the fee as “refinance Mortgages with Settlement Dates on or after September 1, 2020.” Likewise, Fannie Mae has stated that the new fee applies to “Whole loans purchased on or after Sep. 1, 2020, and Loans delivered into MBS pools with issue dates on or after Sep. 1, 2020.”
The impact will be significant for lenders and consumers alike. In the short term, lenders may have to absorb approximately $1,400 in added costs (based on the nationwide median home price) on each mortgage loan originated. Although it remains to be seen, it is expected that these costs will be passed along to consumers in the form of higher interest rates or costs paid up front.
In addition to purely economic concerns, the GSEs’ implementation of this new fee may create unintended compliance hurdles for originating lenders. For example, it may create disclosure issues for loans already in the queue, including situations where lenders may not have time to disclose changes required by the TILA-RESPA Integrated Disclosure (TRID) Rule. The change could also transform some smaller loans into a “higher-priced mortgage loan” triggering added compliance burdens under the Truth in Lending Act, including appraisal and escrow requirements.
The proposed change has certainly not been received warmly thus far. In a sometimes rare show of solidarity, industry and consumer groups have jointly denounced the GSEs’ move and have called for them to rescind the proposed fee, as Americans continue to dig out of economic hardship caused by the ongoing pandemic. These groups fear that the new fee will place downward pressure on the entire refinance market, further threatening the prospect for economic recovery.
1Fannie Mae Lender Letter 2020-12 (08/12/20), available here.
2Freddie Mac Bulletin 2020-32 (08/12/20), available here.
3“Financial, Housing and Consumer Groups Criticize New GSE Fee on Refinances, Call for Withdrawal,” ABA Banking Journal (08/13/20), available here.