Beginning on April 1, Fannie Mae follow in Freddie Mac’s footsteps and formally raise the fees that they charge lenders, which will almost certainly pass these fees on to borrowers. The bottom line is that for virtually all borrowers, obtaining a mortgage is set to become significantly more expensive.
As mentioned earlier, Fannie/Freddie are currently hemorrhaging money at the combined rate of $1-2 Billion per month. While the government hasn’t yet determined how these two organizations – which currently underwrite 95% of all new mortgages and without whom, the mortgage financing system would collapse – in the mean time, it will certainly seek to limit their losses. Thus, the expansion of “loan-level price adjustments” should not have come as too much of a surprise.
Basically, Fannie/Freddie charge lenders fixed fees for all mortgages that they agree to purchase, and in return, the lender is alleviated of most of the risk. In the past, these fees were relatively modest, and certainly inadequate to offset the risk borne by Fannie/Freddie. Meanwhile, a few years have already passed since the collapse of the housing bubble touched off a wave of defaults, and since then, the mortgage behemoths claim to have learned a few lessons about the actual creditworthiness of borrowers.
Under the proposed changes, all borrowers will be charged an “adverse-market” fee of .25%, which can be paid upfront or rolled into the mortgage. Supplementary “risk-pricing” fees will be set in terms of the borrower’s credit rating, downpayment size, mortgage type, property type, and a handful of other factors. Only those borrowers (encompassing about 12% of the total) with FICO credit scores above 740, that make downpayments >25% for stand-alone residential properties will be exempt from this additional layer of fees. Everyone else will be required to pay up to 3% in fees, depending on their risk profile.
It’s worth pointing out that FHA loans are naturally exempt from these additional fees. In addition, “not all lenders sell all mortgages to the secondary market, so not all loans are subjected to the fees.” In addition, given that the profitability of issuing mortgages has surged in the last year (due to shrinking competition), it’s possible that some of the additional fees will be absorbed by lenders.
A few tips for borrowers, then. All else being equal, try to close on your mortgage before April 1. If you haven’t yet looked into the possibility of obtaining an FHA loan (which permit lower down-payments and lower credit scores), you should probably consider doing so. (However, FHA loans are also becoming more expensive and carrying higher restrictions). Next, make sure that your credit score is as high as possible, and that your credit report is free of errors. A difference of 5-10 points in your score could make a big difference in the fees that your lender charges you.
Finally, remember to shop around for a mortgage, and that all fees are ultimately negotiable. As I said, the dynamics of mortgage lending have changed dramatically since the collapse of the housing bubble, and it’s possible that your lender will agree to certain fee reductions in order to retain your business.