Covid-19 Set To Make Home Refinancing Much More Expensive
With mortgage rates still at historic lows, the time may seem opportune to refinance. Departure September 1st, however, the cost of refinancing a mortgage increases due to the economic risks associated with Covid-19.
Both Freddie Mac and Fannie Mae announced a new 0.5% mortgage refinancing commission. The fees arise as mortgage refinancing accelerates due to falling interest rates. Fannie Mae calls it a Unfavorable Market Refinancing Fee. In the letter from the lender (LL-2020-12) Fannie Mae said the charges were “in light of the uncertainty in the market and the economy resulting in higher risks and costs for Fannie Mae.”
On the same day, Freddie Mac announced a Market condition Credit commission in the price. Freddie Mac attributed the new 0.5% fee to Covid-19: “Due to risk management and loss forecasts precipitated by economic and market uncertainty related to COVID-19, we are introducing a new commission credit on the market condition in the price. “
The new fees apply to both withdrawal and non-withdrawal mortgage refinancings. It does not apply to certain construction conversion mortgages. The fees also do not apply to mortgage refinances not sold to Freddie Mac and Fannie Mae or to mortgages used to purchase a home.
Some have wondered why the refinancing fee, if it comes to dealing with economic uncertainties due to Covid-19, does not also apply to mortgages for the purchase of a home. One possible explanation is that Freddie and Fannie determined that mortgage refinancing has risks not present in home purchase loans. This could be the case, for example, for those refinancing to reduce monthly payments, withdraw money or both while facing potential unemployment or other negative economic consequences from the pandemic.
This is not the first time that additional charges have been added due to unfavorable economic conditions. During the financial crisis of more than ten years ago, Fannie Mae took a 0.25% fee on all mortgages.
New refinancing fees are substantial
The additional cost is substantial for homeowners looking to take advantage of lower mortgage rates or to withdraw money from their home. The refinancing fee is added to $ 500 for every $ 100,000 refinanced. The fee will cost the average consumer $ 1,400 in additional fees, according to to the Mortgage Bankers Association. The costs are likely to be passed on to consumers in the form of higher fees or higher mortgage rates.
The new fees come as Republicans and Democrats are locked in a battle on another stimulus cycle. Negotiators on both sides ended talks more than a week ago and the Senate adjourned until after Labor Day. Earlier this month, President Trump took several executive steps aimed at providing additional unemployment benefits, reduction in the repayment of student loans, moratorium on evictions and payroll tax holiday.
For those refinancing a mortgage, however, the additional fees could erase many of the stimulus benefits Mr. Trump implemented. Refinancing fees could also eclipse the value of a second dunning check and is at odds with the Fed’s efforts to keep rates low redemption securities backed by mortgages.
Critique of the new refinancing fees
The reaction to Freddie and Fannie’s actions was swift and critical. The Mortgage Bankers Association called for a fee reversal: “This announcement is bad for homeowners in our country and for the burgeoning economic recovery. We strongly urge the FHFA, which had to approve this policy, to withdraw this untimely and misguided directive. “
David H. Stevens, former Federal Housing Administration commissioner, described the new fees as giving consumers the “middle finger”:
Even the White House has criticized the new tax. 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 considering it.” . . . It only seems to help Fannie and Freddie and not the American consumer.
Although the new fees make refinancing more expensive, lowering the interest rate on a mortgage can still be a good deal. Interest rate remain at historically low levels, which can benefit those who are trying to lower their rates, withdraw money, or both.