With mortgage rates still at historic lows, it may seem like a good time to refinance. Starting September 1, however, the cost of refinancing a mortgage is going up due to economic risks associated with Covid-19.
Both Freddie Mac and Fannie Mae have announced a new mortgage refinancing fee of 0.5%. The fee comes as mortgage refinancing accelerates due to lower interest rates. Fannie Mae calls it an Adverse Market Refinance Fee. In Lender Letter (LL-2020-12) Fannie Mae said the fee was in “light of market and economic uncertainty resulting in higher risk and costs incurred by Fannie Mae.”
On the same day, Freddie Mac announced a Market Condition Credit Fee in Price. Freddie Mac attributed the new 0.5% fee to Covid-19: “As a result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty, we are introducing a new Market Condition Credit Fee in Price.”
The new fee applies to both cash-out and no cash-out mortgage refinances. It does not apply to certain construction conversion mortgages. The fee also doesn’t apply to mortgage refinances not sold to Freddie Mac and Fannie Mae or mortgages used to purchase a home.
Some have questioned why the refinancing fee, if it’s to address economic uncertainties due to Covid-19, doesn’t also apply to home purchase mortgages. One possible explanation is that Freddie and Fannie have determined that mortgage refinancing presents risks not present in home purchase loans. This could be the case, for example, for those refinancing to reduce monthly payments, pull out cash, or both while facing potential unemployment or other adverse economic consequences due to the pandemic.
This is not the first time additional fees have been added due to adverse economic conditions. During the financial crisis more than a decade ago, Fannie Mae levied a 0.25% fee on all mortgages.
The New Refinancing Fee is Substantial
The additional cost is substantial for homeowners looking to take advantage of lower mortgage rates or to pull cash out of their home. The refinancing fee adds $500 for every $100,000 refinanced. The fee will cost the average consumer $1,400 in additional fees, according to the Mortgage Bankers Association. The costs will likely flow to consumers either as increased fees or increased mortgage rates.
The new fee comes as Republicans and Democrats are locked in a battle over another round of stimulus. Negotiators for both sides ended talks over a week ago, and the Senate has adjourned until after Labor Day. Earlier this month, President Trump took several executive actions aimed at providing additional unemployment benefits, student loan repayment relief, an eviction moratorium and a payroll tax holiday.
For those refinancing a mortgage, however, the additional fee could erase many of the stimulus benefits Mr. Trump implemented. The refinancing fee could also eclipse the value of a second stimulus check and is at odds with the Fed’s efforts to keep rates down by repurchasing mortgage backed securities.
Criticism of New Refinance Fee
Reaction to Freddie and Fannie’s actions was swift and critical. The Mortgage Bankers Association called for a reversal of the fee: “This announcement is bad for our nation’s homeowners and the nascent economic recovery. We strongly urge FHFA, which had to approve this policy, to withdraw this ill-timed, misguided directive.”
David H. Stevens, former Federal Housing Administration commissioner, described the new fee as giving consumers the “middle finger:”
Even the White House criticized the new fee. A senior White House official said in a written statement to the WSJ that the “White House has serious concerns with this action, and is reviewing it. . . . It appears only to help Fannie and Freddie and not the American consumer.”
While the new fee makes refinancing more expensive, reducing the interest rate on a home mortgage may still be a good deal. Interest rates remain at historic lows, which can benefit those trying to lower their rate, taking cash out, or both.