Mortgage Rates to Take Big Hit from Fee Hikes

As loan officers and borrowers prepare for the Federal Open Market Committee's ("the Fed") potential tapering announcement Wednesday, Fannie Mae and Freddie Mac ("the GSEs") Tuesday released new pricing adjustments that dramatically raise costs for borrowers in 2014.  The new fees are mandated by the Federal Housing Finance Agency (FHFA) as a part of their strategic plan to encourage private capital to reenter the mortgage market, which is currently dominated by the GSEs.

There are two parts to the fee increase.  The first of which has already been seen on three occasions (2 from the FHFA and 1 to pay for the payroll tax extension) and involves a permanent increase of 0.1% to the RATE (on average) for all new loans.  This is a known quantity for the mortgage market and similar increases are mandated every year until 2021.  No surprises there.

The added layer of complexity comes from the upfront portion of the fee increase.  While the ongoing fees don't vary based on strength of a loan file (borrower credit and loan details), the upfront fees, known as "Loan Level Price Adjustments" (LLPAs) can vary greatly. 

In the original announcement about the fee increases, the FHFA said that LLPAs would be changing to more appropriately align costs with credit risk, but that did little to prepare mortgage market participants for the magnitude of the changes.  What sounded like a bit of shuffling was revealed yesterday to be an across the board hike for anyone borrowing more than 60% of their home's value. In some cases, these hikes are severe.  The blanket base increase of 0.25% will end up netting out to 0.00% in many cases due to the removal of 0.25% "Adverse Market Delivery Charge" (AMDC) in all states except CT, FL, NY, and NJ.

Current LLPAs range from a credit (meaning some borrowers receive a cost discount) of .25% of the loan amount (or $250 on a $100,000 loan) to a penalty of 3.25% (a hefty $3250 cost for a $100,000 loan) for borrowers with lower credit scores and less equity.  Substantial additional charges are incurred for cash out refinances, investment properties, and loans with subordinate financing. 

Borrowers with credit scores over 740 currently receive Fannie Mae's lowest LLPA's, but the new standards raise the score required for best pricing to 800, significantly above any prior industry requirements. By comparison, in 2007 a 680 score qualified buyers for best loan pricing.

As shown on the table below, depending on the combination of credit score and LTV (the ratio of a borrower's loan to the value of the home or the purchase price in the case of a purchase), some borrowers will face well over a point in additional fees above and beyond the existing LLPAs.  Interestingly, costs for lower credit scored borrowers were not increased, while those in the 680-759 score range (the majority of borrowers) face the stiffest hikes.  A home buyer with a 720-739 score who borrows $200,000 and puts down 10% faces a whopping 1.25% increase ($2500), and that's just in the up-front fees.  The 0.10% increase in the ongoing fee makes for an additional fee over the life of that loan of more than $4000.

Net Change in LLPAs (no AMDC)  in 2014  (FL, CT, NY, NJ add 0.25%)

The fee increases to borrowers come even as the Consumer Protection Finance Bureau enacts new limits on the costs borrowers can be charged to obtain loans.  The limits, however, do not include fees charged by FHFA.

In addition to the hikes on Conforming Loans, FHA recently increased their upfront and monthly insurance premiums and made them effective for the life of the loan (drastically impacting borrowers' lifetime costs), stating an intent to effectively drive loans to the private sector.  While some credit unions, banks, and other private lending institutions will certainly expand their private lending portfolios, they're not waiting in the wings with rates and fees even remotely close to current market levels.

The widespread fee hikes come as the Federal Reserve continues to purchase $40 Billion per month in Mortgage Backed Securities to boost the economy by supporting the recovering housing market.  But the Fed is widely expected to begin reducing these purchases soon.  Ironically, the time frame in which most economists see this happening is the same as the time frame in which the mortgage fee hikes will be rolled out. 

This is a potentially debilitating one-two punch for many borrowers and it raises serious questions as to the unintended consequences of these ambitious fee hikes.  The changes are set to go into effect for loans sold to the agencies beginning in April 2014.  That means lender rate sheets may start adjusting for the new fees shortly into the new year.

The last time the ongoing fee was increased, some lenders adjusted rate sheets literally overnight and with little rhyme or reason as to the timing.  The only known is that virtually all borrowers will soon face higher costs and rates, and a fragile housing recovery will deal with yet another major challenge.