Almost a year ago to the day, the Federal Housing Finance Agency (FHFA) announced a new refinance fee which would end up costing homeowners thousands. It was a surprise announcement by then-director Mark Calabria, which would take effect in a loan-level price adjustment equal to 0.5% of the loan amount.
Mark Calabria believes in the privatization of industries, free from government control. Fannie Mae (FNMA) and Freddie Mac (FHLMC) haven’t been since the mortgage bailout after the 2008 crash, which kept FNMA and Freddie Mac from going under and placed them under conservatorship by the newly created Federal Housing Finance Administration.
Mark Calabria didn’t like this and wanted to bring FNMA and FHLMC out from under this umbrella of control. To do this, he needed cash, and lots of it. Leading up to the forbearance options that became available to homeowners in 2020, the cash reserves between Fannie and Freddie were close to $30 billion.
Why was the refinance fee added?
Once homeowners started taking advantage of forbearance options, mortgage servicers needed liquidity to bridge the gap in payments no longer coming in on many mortgages throughout the United States. Fannie and Freddie had to use their cash reserves to make the payments on non-performing mortgages so that the underlying bonds continued to give a yield to the investors holding them.
If the underlying bonds securitizing residential mortgages in this country stopped performing, bonds would become a risky investment, which would cause their prices to drop significantly due to massive sell-offs. If this were to happen, rates would skyrocket.
Pressure mounted on all sides for Calabria to use the FHFA’s pile of cash (via Fannie and Freddie) to hold the economy together by helping mortgage servicers continue to make their necessary payments on underlying mortgage-backed securities, which they serviced. He caved to the pressure but looked to America’s homeowners to bring back the missing cash. This took place in the form of the Adverse Market Refinance Fee.
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Was the refinance fee the correct approach?
An interested observer could look at the new refinance fee in a couple of different ways.
Some might say it was a reasonable approach to a liquidity crisis sitting on the steps of the FHFA—one that had been making its rounds through hedge funds, agencies, and Fortune 500 companies alike since the start of the COVID-19 pandemic. But it could also be viewed as a way to fund his vision of Fannie and Freddie’s future—freedom from government conservatorship. However you interpret it, it cost Americans money.
When you get a mortgage, 64 things can change the rate. These are known as LLPAs (loan-level price adjustments). The most common are credit score, loan to value, property type, and mortgage purpose (e.g., cash-out or purchase).
For example, let’s say you are offered a rate of 2.75% on a 30-year fixed mortgage, with no points. If this were a refinance, and the Adverse Market Refinance Fee were to apply, then 2.75% would no longer be par (no points); it would have a cost of a half of a point, equivalent to 0.5% of the amount borrowed.
To put this into perspective, any time you obtain a mortgage, you can buy down the interest rate from the no points option. Typically, a half-point fee would lower your rate by around 0.25%, so in effect, this adverse market refinance fee increased rates on refinances by about a quarter of a percent.
This made a lot of people mad. While most of the country was taking advantage of lower interest rates on their mortgages, set in motion by the Federal Reserve to stimulate the economy during times of hardship, the FHFA was increasing rates, marching to the beat of a different drum.
As was the case with the Consumer Finance Protection Bureau under Donald Trump, it was unclear if the President of the United States had the authority to fire the director of the FHFA. However, in June (Collins vs. Yellen), the Supreme Court ruled that the President can fire the director of the FHFA at will, as opposed to for cause only.
It didn’t take long for Director Calabria to tender his resignation—DC’s formal approach to those who find themselves serving at the displeasure of the President.
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What’s happening now?
Biden promptly appointed Sandra Thompson as the acting director of the FHFA. Within days, Director Thompson eliminated the Adverse Market Refinance Fee. “The COVID-19 pandemic financially exacerbated America’s affordable housing crisis. Eliminating the Adverse Market Refinance Fee will help families take advantage of the low-rate environment to save more money,” said Thompson. “Today’s action furthers FHFA’s priority of supporting affordable housing while simultaneously protecting the safety and soundness of the Enterprises.”
The briefing also noted that mortgage forbearances were sitting below 2%, down from a high of 5% in May of 2020. Therefore, with less of a cash crisis and ongoing need, Director Thompson eliminated the fee.
Bill Dallas, mortgage mogul, and current CEO of Finance of America, recently railed against what he called the prehistoric underwriting guidelines of Fannie Mae and Freddie Mac. To quote an MPA article by David Kitai, “Dallas believes that this ‘antiquated’ system persists because agency loans are underwritten by the government and subject to fair lending requirements that regulate borrowers through the same funnel.”
He goes on to say, “Homebuyers are entering a challenging and competitive housing market and Dallas believes the mortgage market now is failing to enable borrowers who don’t fit in the strict value parameters of an agency loan.”
Much to the chagrin of homeowners and loan officers, Director Calabria’s actions were much needed and overdue. We’ve not had a director of this agency pushing to get out from government conservatorship since this started after the 2008 housing crash. Keeping the agencies under this umbrella creates an unlevel playing field in the mortgage space by placing low-risk favoritism on mortgages sold to Fannie Mae and Freddie Mac.
There are many mortgage programs in the market that fill various needs, but the most common fall inside the square box created by Fannie Mae and Freddie Mac. By opening up the playing field, you would start to see more mortgage options competing with each other on rate and terms, widening the possibilities for non-conventional buyers.