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New Fannie, Freddie fees boost mortgage cost

You know how the auto insurer raises your premium after an accident? Something similar is happening to mortgage fees. They're getting more expensive for a lot of people.

Many borrowers will be socked with a fee that amounts to $250 for every $100,000 borrowed, just because the mortgage market has gone so bad. Other customers will take bigger hits because their credit scores are lower than 680 and they're borrowing more than 70 percent of the home's value.

The fees will be tacked onto mortgages guaranteed by Fannie Mae or Freddie Mac, the government-sponsored enterprises that help keep money circulating for home loans. The companies say they introduced the new charges to compensate for the risks inherent in guaranteeing mortgages in an era when house prices are declining, delinquencies are rising and mortgage investors are losing money.

"It's an ugly situation," says Jim Sahnger, a mortgage consultant for Palm Beach Financial Network in Stuart, Fla. "It's going to impact a lot of people."

Risk-based pricing arrives
A quarter-point fee will affect just about everyone who gets a conforming mortgage -- a home loan for $417,000 or less that's not considered subprime and is not insured by the Federal Housing Administration. Additional fees will affect borrowers who have credit scores below 680 and who will owe more than 70 percent of a home's value. Still others apply to anyone buying an investment property or getting a 40-year mortgage. The riskier the loan, the pricier the fees.

"We've been talking about risk-based pricing for years. It's here," says Bob Walters, chief economist for Quicken Loans.

The charges will be assessed on loans that are securitized after the end of February 2008. Because securitization takes time, some lenders started levying the fees in November. Soon, all lenders will pass along the new fees, either as closing costs or by charging higher interest rates.

Protect credit score
For consumers, the new charges come at an awkward time. Credit scores often take a dive during and after the holiday shopping season because people run up their credit card balances. Maxing out a store charge card could cause someone's credit score to dip below 680, subjecting the oblivious shopper to mortgage fees in the new year.

"For some of these people who are thinking they might want to refinance after the first of the year, they're going to go out and charge up all their holiday gifts and increase the balances on their charge cards, which will drive down their FICO scores," Sahnger says. He warns that some "could be potentially pushed out from qualifying," while others will find that it no longer makes sense to refinance.

He and other brokers suggest paying off holiday debts as quickly as possible in hopes of raising one's credit score.

Next: "Mortgage professionals don't believe the fees are solely about risk."
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