Mel Watt, who is scheduled to take the reins of the Federal Housing Finance Agency Jan. 6, says he plans to delay proposed increases in fees that Fannie Mae and Freddie Mac charge lenders to offset the risk of securitizing mortgages, Bloomberg reports.
Lenders and other industry participants claimed that the increases, some of which were announced on Dec. 9 by Edward J. DeMarco, the FHFA’s current acting director, were too drastic and would unfairly jack up mortgage rates for a large swath of borrowers.
Pricing updates recently issued by Fannie and Freddie in response to FHFA’s direction showed that fees would rise sharply on loans to borrowers making down payments of less than 20 percent and credit scores in the 680 to 760 range, The Wall Street Journal reported.
A lender funding a 30-year fixed-rate loan to a homebuyer with a 735 credit score and putting 10 percent down on a home purchase would pay fees totaling 2 percent of the loan amount, up from 0.75 percent today, which would translate into a 0.4 percentage-point increase in their borrower’s mortgage rate.
“I felt it was important to announce my intentions now because of the prospect that some lenders could start to price the proposed changes into the market well before the effective dates,” Watt said in an e-mail to reporters, Bloomberg said.
The increased guarantee fees and loan-level pricing adjustments are intended to make privately financed mortgages not backed by Fannie and Freddie more competitive. Guarantee fees cover investors who buy securitized mortgages from Fannie Mae and Freddie Mac, ensuring that they continue to receive principal and interest payments even when borrowers default. Loan-level pricing adjustments are intended to provide an additional margin of safety on riskier loans.
Lenders who sell mortgages to Fannie Mae and Freddie Mac pay the fees to the two institutions. If Fannie and Freddie raise the fees, lenders generally pass the cost of the increases on to borrowers in the form of higher rates.
