Fannie and Freddie Adverse Market Fee
By Jeff Cornelius - December 15, 2020
Effective December 1, 2020, Fannie Mae and Freddie Mac imposed a .500% “Adverse Market Fee” to all refinance transactions. You might be wondering, “why would they be doing this during a time when so many loans are being originated?” This certainly doesn’t seem like an “adverse market” for the mortgage industry.
Keep in mind, this fee is for re-fis only. When Fannie and Freddie purchase loans on the secondary market, their financial models assume a loan will perform for 4-5 years or more. Today, people are refinancing loans they made 2-3 years ago to take advantage of historically low rates. When loans get paid off that early, Fannie and Freddie lose money. So, this is seen as a temporary fee to hedge against losses for loans that are already on their books. Although temporary, there is no expiration date that has been set.
Jeff McAlister, a Senior Production Partner with Cornerstone Home Lending, said “This has flown under the radar for most consumers as rates are still at historic lows. Remember, we’re only talking about re-fis, not purchase loans, so this hasn’t affected those looking to buy.”
McAlister added “This fee has simply been passed on to the consumer and it becomes part of the Loan Pricing Adjustment, which is unique to each loan.” The Loan Pricing Adjustment is affected by loan to value (LTV) of the property, the use of the property – whether it’s a primary residence or investment property, and the type of property – single family, multi-family, or condo for example.
We asked Jeff if this has negatively affected the re-fi market and his response was “Not really. The .500 fee in price would only affect rates by .125% or .250% so if the rate today is 3%, best case it would have been 2.750%. Most people doing re-fis are shaving a point or more off their current mortgage, so it still makes sense at 3%.”
When asked if he thought people should wait and re-fi when the fee is removed, McAlister said “If a re-fi makes sense at today’s rates, I wouldn’t wait. First, we don’t know when the fee might be removed and second, if it is removed, rates will likely be higher, cancelling out any advantage by waiting.”
Go Back Keep in mind, this fee is for re-fis only. When Fannie and Freddie purchase loans on the secondary market, their financial models assume a loan will perform for 4-5 years or more. Today, people are refinancing loans they made 2-3 years ago to take advantage of historically low rates. When loans get paid off that early, Fannie and Freddie lose money. So, this is seen as a temporary fee to hedge against losses for loans that are already on their books. Although temporary, there is no expiration date that has been set.
Jeff McAlister, a Senior Production Partner with Cornerstone Home Lending, said “This has flown under the radar for most consumers as rates are still at historic lows. Remember, we’re only talking about re-fis, not purchase loans, so this hasn’t affected those looking to buy.”
McAlister added “This fee has simply been passed on to the consumer and it becomes part of the Loan Pricing Adjustment, which is unique to each loan.” The Loan Pricing Adjustment is affected by loan to value (LTV) of the property, the use of the property – whether it’s a primary residence or investment property, and the type of property – single family, multi-family, or condo for example.
We asked Jeff if this has negatively affected the re-fi market and his response was “Not really. The .500 fee in price would only affect rates by .125% or .250% so if the rate today is 3%, best case it would have been 2.750%. Most people doing re-fis are shaving a point or more off their current mortgage, so it still makes sense at 3%.”
When asked if he thought people should wait and re-fi when the fee is removed, McAlister said “If a re-fi makes sense at today’s rates, I wouldn’t wait. First, we don’t know when the fee might be removed and second, if it is removed, rates will likely be higher, cancelling out any advantage by waiting.”