New Fannie, Freddie fees boost mortgage cost
Mortgage mess to blame
Fannie and Freddie, which are government-sponsored enterprises, or GSEs, collect guarantee fees on bundles of loans that they securitize. In exchange, the GSEs make sure that the investors are paid, even if the borrowers miss payments. Thus, guarantee fees act like insurance. Guarantee fees are going up in reaction to this year's turmoil in the mortgage business, just as auto premiums increase after a claim.
Everyone getting a mortgage securitized by Fannie and Freddie -- and that's probably a majority of home loans nowadays -- will pay a fee of a quarter point, or $250 for each $100,000 borrowed. Fannie calls it an "adverse market delivery charge" and Freddie calls it a "market condition delivery fee" that it is imposing "due to continued deterioration in the mortgage market."
Credit score effect
Other fees are added on top of the adverse market charge. These fees vary, depending on credit score, loan-to-value ratio, whether there's a piggyback loan and other factors. Someone with a credit score below 620, who makes a down payment of less than 30 percent, will pay a fee of 2 percent of the loan amount -- $2,000 for every $100,000 borrowed. The fee would be lower -- 1.25 percent -- for someone getting the same loan, but with a credit score of 640 to 659.
Anyone getting a piggyback loan and owing a total of more than 90 percent of the home's value will pay a quarter-point fee, regardless of credit score -- if such a loan is available at all. That fee is doubled for borrowers who get interest-only loans and have credit scores below 720.
Lenders have the option of converting the fees into higher rates for customers who don't want to pay the cash upfront. In such a case, a 1-point fee -- that is, a charge of 1 percent of the loan amount -- generally translates into an increase of one-quarter of a percentage point on the rate. A borrower might have the option of paying a 1-point fee and getting a 6.25 percent rate, or paying no fee and getting a 6.5 percent rate.
But 4-to-1 conversion of points into rate is merely a rule of thumb. In some cases, a 1-point fee might turn into a half-point hike in the rate. It depends on how risky the borrower is deemed, what's going on with rates that day, and how the broker or loan officer is compensated.
"It's really hard to come up with a pat answer," says Dan Dowling, president of United Mortgage Capital Corp., in Altamonte Springs, Fla. "But the bottom line of this is borrowers that represent greater risk are going to be paying a higher interest rate."
Lack of competition opens door
Mortgage professionals don't believe the fees are solely about risk.
They suspect it's also about market power. Before this year's mortgage
meltdown, Fannie and Freddie had a lot of competition in the business
of securitizing mortgages. Much of that competition has evaporated,
leaving Fannie and Freddie free to add fees, and there's little
that lenders and brokers can do about it.
The mortgage industry, abetted by the Federal Reserve, started the housing mess by charging rates and fees that were too low in light of the risks involved. Easy money led to house prices spiraling upward, which led to even looser credit.
Now the opposite is happening. House prices are falling, and lenders are tightening credit standards and raising rates. Fewer people qualify for loans, leading to fewer buyers, causing house prices to fall further.
"What's interesting about this," Walters says, "is it will create a kind of self-perpetuating thing. Restricting credit to people in a declining market will make it decline even more. In defense of Fannie and Freddie, these guys are taking substantial losses. So they're basically saying, 'Well, we haven't priced to the risk -- and now we are.'"
And so today's borrowers pay for yesterday's mistakes.