Market Response on Fannie Mae, Freddie Mac "Adverse Market Fee

David Cohn
Sep 18, 2020
Industry Insights

This year, effective September 1, federally-backed mortgage companies Fannie Mae and Freddie Mac have started imposing a 0.5% "adverse market fee" on most refinanced mortgages.

The move drew an immediate backlash from mortgage industry experts who agree that it will make it so much harder for borrowers to refinance.

Why is there a need for this fee?

Both lenders say that the new fee covers the risks brought on by recent events. In a letter, Fannie Mae addressed to lenders, explains that this adverse market fee needs to be implemented "in light of market and economic uncertainty" that has resulted in "higher risk and costs."

It is to be used to cover projected pandemic-related losses and ensure that they can maintain market stability during uncertain times. The Federal Housing Finance Agency (FHFA) has approved the request to impose the new fee on all mortgage refinance acquisitions.

For its part, the FHFA says that it will ensure that Fannie Mae and Freddie Mac both fulfill their missions while ensuring liquidity throughout the economic cycle.

According to Fannie Mae, its current forecasts on the severity of the pandemic's impact may substantially change as the months go by.

A company spokesperson said they are finding it difficult to predict this unprecedented health crisis's actual effects on their business, financial results, and overall financial condition.

How much more will borrowers pay?

In efforts to lower the cost of their monthly payments, many homeowners have refinanced their mortgages to take advantage of the cratering mortgage rates since the pandemic's onset. But this new adverse market fee effectively raises costs for consumers planning to refinance.

By how much? According to the Mortgage Bankers Association, average consumers will pay around $1,400 more. This new price adjustment applies to all refinances.

Until when will the adverse market fee be in effect?

As of this writing, neither Fannie Mae nor Freddie Mac has specified an end date for this extra fee.

Market response to the adverse market fee

Many mortgage experts believe that Fannie Mae and Freddie Mac's rationale for the new loan-level price adjustment rings hollow. It puts even more pressure on consumers who are already struggling with the worst economic climate since the Great Depression.

Some have even described the additional $1,400 fee for every refinance as "outrageous."

The policy is similar to the additional fee implemented by these government-sponsored enterprises during the 2008 financial crisis.

But the situation then and now markedly different. In 2008, Fannie Mae and Freddie Mac imposed the fee while facing dramatic losses caused by the housing crash.

Both GSEs were immediately placed in government conservatorships soon after they announced the 2008 fees—conservatorships that exist to this day.

Now in 2020, both Fannie Mae and Freddie Mac have the US government's financial backing. The coronavirus pandemic has largely spared the mortgage industry—at least so far; what's more, the combined second-quarter earnings of both GSEs amount to $4.33 billion.

Mortgage experts say that the policy contradicts the Federal Reserve's steps to stabilize the US economy. To encourage credit flow, the Fed has been continuously buying billions worth of mortgage-backed securities every month.

Making it more expensive for people to take advantage of record-low interest rates completely contradicts what the Fed is trying to accomplish to save the country from an economic sinkhole.

The irony is striking. The Fed is essentially printing more money to purchase government-guaranteed MBS in efforts to keep markets flowing, drive mortgage rates government-guaranteed mortgage-backed securities, encourage refinancing, and ultimately help consumers save money.

But the FHFA now wants to grab those savings and give them to Fannie Mae and Freddie Mac.

The Community Home Lenders Association has also expressed its support for rescinding the policy, saying that raising mortgage rates can hurt working-class families.

They are trying to utilize refinancing and low-interest rates to strengthen their financial position.

The association also slammed the short notice provided by Fannie Mae and Freddie Mac, adding that the new policy can create issues for loan locks and that lenders may ultimately have to shoulder the costs.

Loan locks refer to agreements between lenders and borrowers to maintain a steady interest rate for a certain period.

Some industry researchers are not worried, though. They believe that the adverse market fee will only cause a very slight rise in interest rates and are unlikely to impact refinance volumes in a meaningful way.

But even they agree that consumers are going to end up paying this cost and that it makes no sense to dilute the benefit of mortgage refinancing amid the worst economic downturn we've seen in 90 years.

For its part, the FHFA quickly clarified that Fannie Mae and Freddie Mac have limited capital compared with similar-sized financial institutions.

They are currently only allowed to hold a buffer of $45 billion (combined)—and this cushion is far too small, according to the FHFA, especially now that the initial forbearance period is ending and borrowers have to resume payments.

The agency is now looking to finalize a new post-conservatorship capital framework that will require both Fannie and Freddie to hold more than five times their current capital levels.

Some analysts say that the adverse market fee may be necessary to shore up capital and reduce the risk of these GSEs burning through their limited funding and eventually requiring taxpayer assistance via preferred capital lines.