Fannie Mae and Freddie Mac Mortgage Refinances Just Got More Expensive

Last updated on October 30th, 2020

Way to rain on our parade, Fannie Mae and Freddie Mac.

Just when mortgage rates were hitting record lows, the pair decided to add a new fee to mortgage refinances in light of the ongoing pandemic.

Simply put, they expect more losses related to a higher rate of loan defaults, and are adjusting their pricing accordingly. And refinance rates are higher to begin with so it’s a double-whammy.

Remember, they don’t lend directly, but rather purchase and securitize many of the mortgages that are funded by banks and mortgage lenders.

As such, this new cost will be passed along to you, the consumer.

Introducing the Adverse Market Refinance Fee

  • Fannie Mae and Freddie are charging a new fee to account for higher risk related to COVID-19
  • It applies to all mortgage refinance transactions, including those without cash-out
  • Only exception is certain single-close construction-to-permanent loans
  • The new fee will apply to mortgages with settlement dates on or after September 1st, 2020

On August 12th, both Fannie Mae and Freddie Mac released lender letters discussing a new fee that they’re going to tack onto ALL mortgage refinance loans.

Known as the “Adverse Market Refinance Fee,” it is designed to cover higher costs associated with increased risk thanks to COVID-19.

Instead of absorbing that cost themselves, they’re passing it onto homeowners, even if you don’t actually pose any additional risk to Fannie and Freddie, collectively known as the government-sponsored enterprises (GSEs).

Fannie Mae said the new fee is being charged as a result of “market and economic uncertainty resulting in higher risk and costs incurred by Fannie Mae.”

Meanwhile, Freddie Mac said it “is a result of risk management and loss forecasting precipitated by continued economic and market uncertainty.”

In other words, they expect more of these new refinance loans to sour at some point after origination, despite borrowers likely obtaining lower interest rates and corresponding monthly payments.

Makes sense, right?

How Much More Expensive Will a Mortgage Refinance Be?

  • The Adverse Market Refinance Fee is 50 basis points in price (not rate)
  • This will result in either higher closing costs or a slightly higher mortgage rate
  • Someone with a $300,000 loan amount may have to pay an extra $1,500 in closing costs
  • Or accept a higher mortgage rate to absorb those costs so they aren’t paid out-of-pocket

Fannie Mae and Freddie Mac are tacking on a 50-basis point fee to both no cash-out and cash-out refinance mortgages.

This means rate and term refinances where you don’t actually pull any cash out are subject to the fee, along with cash out refinances.

The new fee is in addition to any other mortgage pricing adjustments that may otherwise apply to your home loan.

On a $300,000 loan amount, we’re talking about another $1,500 in closing costs, which would likely just result in the borrower taking a slightly higher mortgage rate.

For example, if mortgage rates were to stay constant, and the borrower originally qualified for a 30-year fixed at 2.5% with no costs, their new rate might be 2.625% instead.

The good news is that’d only be a difference of about $20 in monthly payment. But it’s still an unwelcome development for those looking to snag the lowest mortgage rates in history.

It applies to mortgages with settlement dates on or after September 1st, 2020. It’s unclear how long they’ll impose this new Adverse Market Refinance Fee.

If you were thinking about refinancing your mortgage, you may want to do it sooner rather than later.

The big question though is how low will mortgage rates go, as I posed yesterday? If they keep falling from here, this new fee can be absorbed via the lower rates available.

So it’s hard to know if this will actually increase borrowing costs once we factor in where mortgage rates are in September and beyond.

They recently pulled back slightly after hitting new record lows, but it could just be a temporary rise before they reach even lower lows.

Note: This doesn’t affect FHA loans, but it often doesn’t make sense to refinance into an FHA loan due to the mandatory mortgage insurance premiums.

Fannie and Freddie CEOs Respond to Criticism

Folks in the industry were none too happy with the announcement, which eventually prompted a joint letter from the CEOs of Fannie Mae and Freddie Mac, Hugh Frater and David Brickman.

The pair attempted to justify the fee, claiming it wouldn’t cause mortgage payments to “go up” because a refinance generally results in a lower interest rate, which in turn reduces the monthly payment.

But that’s kind of like telling someone don’t worry about our cut, you’re still saving money.

Sure, a borrower’s payment may be lower post-refinance, but not as low as it was supposed to be, thanks to subsidizing an adverse market fee they may have nothing to do with.

The CEOs are basically arguing that with mortgage rates at or near record lows, you’re already saving lots of money, so why get upset. Hmm.

Something tells me that’s not going to go over well either.

Update: After mounting pressure, the FHFA has delayed the implementation date of their Adverse Market Refinance Fee until December 1st, 2020.

Additionally, the new fee will not apply to refinance loans with loan amounts below $125,000, Affordable refinance products, Fannie Mae HomeReady loans, and Freddie Mac Home Possible loans.


FHFA announces further extension of COVID-related mortgage relief

The Federal Housing Finance Agency is providing an additional three months of forbearance to borrowers with loans backed by Fannie Mae and Freddie Mac, totaling 18 months of relief due to the coronavirus pandemic.

The FHFA said Thursday that it was aligning its policies with the Biden administration to address economic burdens for homeowners due to COVID-19. The change comes nearly three weeks after the agency extended the total forbearance period to 15 months.

When Congress passed the Coronavirus Aid, Relief and Economic Security Act last year, it allowed borrowers with federally backed mortgages to request up to 12 months of forbearance — divided into two 180-day increments — if they experienced financial hardship.

In forbearance, a borrower is allowed to suspend payments by extending the loan’s terms. There is no set cutoff date for the 18-month forbearance period because borrowers have entered and exited forbearance at different times.

“Today’s extensions of the COVID-19 forbearance period to 18 months and foreclosure and eviction moratoriums through the end of June will help align mortgage policies across the federal government,” FHFA Director Mark Calabria said.

“Today’s extensions of the COVID-19 forbearance period to 18 months and foreclosure and eviction moratoriums through the end of June will help align mortgage policies across the federal government,” FHFA Director Mark Calabria said.

Bloomberg News

The FHFA also said Thursday that it was extending a moratorium on foreclosures and real estate-owned evictions until June 30 for loans backed by Fannie and Freddie. Because housing prices have jumped dramatically, borrowers are more likely to be able to sell their homes than go into foreclosure than in financial crisis in 2008, when many were underwater on their mortgages.

The foreclosure moratorium had been set to expire on March 31, but the FHFA is offering another three-month extension only for single-family mortgages backed by the government-sponsored enterprises. The REO eviction moratorium applies to properties acquired by the GSEs through foreclosures or deed-in-lieu transactions.

Earlier this month, the Biden administration announced similar extensions of relief for loans backed by the Federal Housing Administration, Department of Veterans Affairs and Department of Agriculture.

“Today’s extensions of the COVID-19 forbearance period to 18 months and foreclosure and eviction moratoriums through the end of June will help align mortgage policies across the federal government,” FHFA Director Mark Calabria said in a press release. “Borrowers and the housing finance market alike can benefit during the pandemic from the consistent treatment of mortgages regardless of who owns or backs them.”

Roughly 2.6 million homeowners were in forbearance plans as of Feb. 14, representing 5.29% of loans serviced, the Mortgage Bankers Association said Monday.

The share of Fannie- and Freddie-backed loans in forbearance fell slightly to 2.97% last week, from 3.01% on Feb. 8, the MBA said. By comparison, 5.22% of all loans serviced are currently in forbearance plans, the MBA said.


FHFA extends forbearance period to 18 months

Borrowers with mortgages backed by Fannie Mae and Freddie Mac may be eligible for an additional forbearance extension of up to six months, the Federal Housing Finance Agency announced Thursday.

On Feb. 9, the FHFA extended forbearance plans an additional three months past beyond their initial 12 month expiration. With the latest edict, the agency is now allowing borrowers up to 18 months of coverage.

According to the FHFA, eligibility for the extension is limited to borrowers who are on a COVID-19 forbearance plan as of Feb. 28, 2021. The FHFA said other limits may apply to the extension but did not provide further details.

With the new extension set in motion, some borrowers may now be in forbearance through Aug. 31, 2022.

The FHFA extended its multifamily forbearance policies in December, pushing forbearance options for multifamily mortgages backed by the GSEs to March 31, 2021, though the agency has yet to say whether the latest extension will also be offered to owners of multifamily properties.

From forbearance to post-forbearance: How to make the process effective

To accommodate the large volume of loans still in forbearance, mortgage servicers must have functional, flexible and effective forbearance processes in place. Here are some actionable steps to create that process.

Presented by: FICS

Alongside its forbearance announcement, the FHFA also said the GSEs will be extending the moratoriums on single-family foreclosures and real estate owned (REO) evictions through June 30, 2021 – three months past the previous deadline set for Mar. 31, 2021. The new date matches the moratorium set by HUD for FHA and USDA loans.

According to FHFA director Mark Calabria, borrowers and the capital markets investors both benefit from consistent treatment.

“From the start of the pandemic, FHFA has worked to keep families safe and in their home, while ensuring the mortgage market functions as efficiently as possible,” Calabria said in a statement Thursday. “Today’s extensions of the COVID-19 forbearance period to 18 months and foreclosure and eviction moratoriums through the end of June will help align mortgage policies across the federal government.”

As of Feb. 22, the Mortgage Bankers Association estimates 2.6 million homeowners are in some form of forbearance. The MBA reported on Monday that the portfolios of Fannie Mae and Freddie Mac dipped down to 2.97%. The GSEs have consistently had lower forbearance rates than other owners of mortgages during the pandemic.

Economic data is starting to show some of the effects of long-term moratoriums. Black Knight’s December mortgage monitor report revealed that foreclosure starts hit a record low in 2020, falling by 67% from the year prior as moratoriums protected homeowners.

According to Black Knight, recent forbearance and foreclosure moratorium extensions have reduced near-term risk, but at the same time may have the effect of extending the length of the recovery period.

Based on the rate of improvement to date, Black Knight estimates there could be more than 2.5 million active forbearance plans remaining at the end of March 2021, when the first wave of plans reaches their 12-month expirations.


Fannie/Freddie Report Record Growth for 2020

Both Fannie Mae and
Freddie Mac (the GSEs) reported strong financial results in the fourth quarter of
and significant growth in their net worth which, for the first time in
their 12 years in conservatorship, they have an unlimited capacity to grow.

Fannie Mae’s net and comprehensive income was $4.6 billion in the
fourth quarter and $11.8 billion for the entire year. The quarterly net and
comprehensive incomes were both about $300 million higher than in Q3, but the
full year fell well short of the 2019 total net of $14.2 billion and
comprehensive of $14 billion.

Revenues were higher at $6.3 billion for the quarter and $21.9
billion for the year. The net revenues for the two earlier periods were $5.9
billion and $18.5 billion, respectively. The company said the decline in net
and comprehensive income for the year despite the higher revenues was due to a
significant decline in credit-related income, from income of $3.5 billion in
2019 to a loss of $(232) million in 2020.

The company acquired $1.4 trillion in mortgages during the year,
up 135 percent from 2019 and the largest volume in its history. The total
represented a $664 billion increase in refinancing. Thirty-eight percent of the
company’s single-family conventional guaranty book of business at the end of
2020 was originated during that year.

At year end 3.0 percent (524,555) of the loans in that guaranty
portfolio was in forbearance, down from 4.1 percent at the end of Q3. However,
12 percent of those forborne loans were still current.

Fannie Mae reported its
net worth at the end of 2020 was $25.3 billion, a year-over-year gain of $10.7
billion. Under the terms of its agreement with the U.S. Treasury, when that net
reached a $25 billion “buffer” the company had to resume net sweep dividend
payments of any excess to Treasury. That agreement was modified last month to
allow both GSEs to begin building capital
which would allow them to fund their
exit from conservatorship.

Freddie Mac reported net
income for the fourth quarter of $2.9 billion and $7.3 billion for the entire
year. Comprehensive income for the two periods was $2.5 billion and $7.5
billion. The year-end totals were $0.1 billion higher for net income and $0.3
billion lower for comprehensive income than in 2019. Comprehensive income was
down because of higher provisions for credit losses.

Interest income for the
full year was $900 million higher than a year earlier at $12.7 billion and the
quarterly share, at $3.7 billion beat the previous quarter by almost $200
million. The company attributed this to portfolio growth and faster mortgage
prepayments due to low interest rates. Guarantee fee income totaled  $1.4 billion compared to $1.1 billion in 2019
and investment gains were almost $1 billion higher.

Freddie Mac said its new
business activity increased 141 percent from 2019 t
o $1.1 trillion, driven by
both purchase and refinance activity which grew because of the low interest
rate environment. The company funded 3.8 million single-family homes,
approximately 27 percent of them through refinancing. The weighted average
loan-to-value ratio of new activity improved from 77 percent in 2019 to 71
percent in 2020.

The company’s Single-Family
guarantee portfolio grew 17 percent to $2.3 trillion. This came through an
increase in single-family mortgage debt outstanding and higher new business

The total net worth of
Freddie Mac grew to $16.4 billion from $9.1 billion at the end of 2019. As with
Fannie Mae, Freddie Mac will no longer have a limit to its net worth after
which it must resume dividends to the Treasury but instead those dividends are
deferred and increase the value of Treasury’s preferred stock holdings. That
value increased from $84.1 billion on September 30, 2020 to $86.5 billion at year’s


FHFA Extends Forbearance Periods an Extra Three Months

Most of the accommodations that have
been allowed lenders and borrowers by the Federal Housing Finance Agency (FHFA)
due to the COVID-19 pandemic were modified or extended this past week. FHFA,
the regulator and conservator of the GSEs Fannie Mae and Freddie Mac, extended
eligibility for mortgage forbearance by three months. Forbearance allows
homeowners who are financially impacted by the pandemic, to temporarily reduce
or forego mortgage payments. It has been available for three-month terms with
extensions available up to a total of 12 months. Existing plans would begin
reaching that deadline at the end of March but FHFA has now authorized an
additional three-month term
, a total of 15 months. An estimated 2.7 million
homeowners are in active plans.

The COVID-19 Payment Deferral allows
forborne homeowners to repay those missed payments at the time their home is
refinanced, sold, or when their mortgage reaches maturity. That program was
originally designed to cover 12 months of missed mortgage payments, but it too
has now been modified to 15 months.

The moratorium on single-family
foreclosures was extended by one month to March 31, 2021 as was the moratorium
on evictions. The eviction moratorium applies to properties held in GSE owned
real estate portfolios

The several, so-called loan
origination flexibilities put in place at the start of the pandemic to allow
continued support for borrowers have also been extended again, now through
March 31, 2021. These include:

  • Alternative appraisals on purchase and rate term refinance loans;
  • Alternative methods for documenting income and verifying employment before loan closing; and
  • Expanding the use of power of attorney to assist with loan closings.  

FHFA says it currently projects that
the GSEs will have to shoulder expenses of $1.5 to $2 billion due to the
existing foreclosure moratorium and its extension. The agency will continue to
monitor the effects of its emergency servicing policies on borrowers, the GSEs,
their counterparties, and the mortgage market and may extend or sunset its
policies based on the data and the health risk.


Fannie Mae’s 2020 earnings fall due to COVID-related credit expenses

Fannie Mae’s full-year net income fell, but linked-quarter profits climbed starting in the spring thanks to low interest rates and the resulting boom in refinance activity.

The government-sponsored enterprise reported a fourth quarter net income of $4.6 billion, up from $4.2 billion in the third quarter and $4.4 billion one year earlier. The government-sponsored enterprise logged $11.8 billion in net income in 2020, a drop from $14.2 billion in 2019 and $16 billion in 2018.

The annual decline was primarily due to nearly $900 million of credit-related expenses incurred as a result of the pandemic, which compared with $3.5 billion of credit-related income in 2019, Fannie’s chief financial officer Celeste Mellet Brown said on the earnings call.

Fannie’s fourth quarter and yearly earnings outpaced Freddie Mac’s respective net incomes of $2.9 billion and $7.3 billion.

“Today’s Fannie Mae is far more resilient than Fannie Mae of yesterday,” said Fannie chief executive officer Hugh Frater on its earnings call. “In 2020, with the greatest labor market disruption since the Great Depression, we provided historic amounts of liquidity to the mortgage market, and we provided forbearance to more than 1.3 million homeowners to help keep them in their homes.”

With mortgage rates reaching new all-time lows in September and again in December, Fannie financed 1.5 million home purchases in 2020, a 20% jump from 2019. The GSE also refinanced 3.4 million loans, a 200% surge from the year before.

Fannie provided a record $1.4 trillion in single-family mortgage liquidity in 2020, with refinancing activity accounting for $948 billion — its highest amount since 2003. The overall volume represented a 135% spike from 2019. The single-family business made a quarterly net income of $3.9 billion — up from nearly $3.8 billion in the third quarter. It pulled in $9.9 billion for the year, down from $11.8 billion in 2019.

The multifamily segment produced a record $76 billion in annual volume. It brought in a net income of $626 million — up from $460 million in the third quarter — and over $1.9 billion in 2020 — down from $2.3 billion the year prior.

The GSEs started 2021 with the Treasury and Federal Housing Finance Agency amending their preferred stock purchase agreements to allow them to hold more capital, another step toward a responsible exit from conservatorship. The agreement largely garnered support from around the mortgage industry.

The amendment allows Fannie to build funds until it achieves “adequate capitalization under the new enterprise framework,” Brown said. “This is essential as it remains a key unfinished aspect of our transformation under conservatorship.”

Fannie also notably re-adopted hedge accounting in an effort to reduce earnings volatility. The first impact of this adoption will be seen in the first quarter of 2021.


Mortgage forbearances rise for second week in a row

The number of mortgages in coronavirus-related forbearance swelled at the end of the month, rising in consecutive weeks for only the third time since the number peaked in May, according to Black Knight.

Forbearances increased by 20,000 from the week before, growing to a total of 2.764 million plans as of Jan. 26. Forborne borrowers represent 5.2% of all mortgages and a combined unpaid principal balance of $551 billion, up from $548 billion week-over-week.

Forbearance totals are ticking upwards at a time when a higher share of such loans are tied to truly distressed borrowers, compared with the beginning of the pandemic, when many borrowers took the COVID forbearance only as a precautionary measure.

“Early on, about 50% of people in forbearance were continuing to make their mortgage payments,” Andy Walden, Black Knight economist and director of market research, said in an interview. “Now that we’ve gotten through December, it’s down to about 12%. So the vast majority of these homeowners in forbearance are behind on payments.”

Among the loan types, only those backed by Fannie Mae and Freddie Mac fell week-over-week, dropping by 4,000 to a total of 925,000. Government-backed mortgages — FHA and VA — rose by 9,000 to 1.149 million overall. Portfolio and private-label securitized loans — which do not fall under CARES Act protections— increased again by 15,000 to a total of 690,000.

“The key date to look at is the end of March because that’s when the first wave of forbearance plans are set to hit their 12-month expirations,” said Walden, who estimated that 600,000 to 700,000 homeowners will reach that expiration. “That’s when we’re really going to understand how that post-forbearance waterfall is functioning, what share of those borrowers are ready to re-perform through a deferral or reinstatement through a modification repayment plan and what additional programs are needed to help.”

Mortgage servicers need to pay advances of $3.4 billion in principal and interest payments and $1.2 billion due in taxes and insurance per month, according to Black Knight’s analysis. Those totals split to estimates of $1 billion and $400 million for government-sponsored enterprise loans, $1 billion and $400 million for FHA and VA, and $1.2 billion and $400 million for private labels.

While the current forbearance program expires on March 31, further extensions are expected. The Biden administration’s latest proposed $1.9 trillion stimulus plan would stretch forbearance, as well as foreclosure and eviction bans, to Sept. 30. While the extensions are necessary to help borrowers in need, servicers will also need consideration in the process, according to Cam Melchiorre, president and director of regulatory compliance at IndiSoft.

“I don’t think we should overlook the financial impact of continued deferrals and forbearance agreements on the servicer. That could take a servicer down because of lack of capital overnight and I would hope legislators are aware of it,” Melchiorre said. “Yes, the consumer is at the front of the line for help but you don’t want to create systemic problems for the industry that’s trying to support everyone.”