Government Loans And Risk-Based FeesThe federal government backs more than 90% of today's U.S. mortgage market, and the majority of that effort is via the Federal Housing Finance Agency (FHFA).
The FHFA was formed last decade as part of the Housing and Economic Recovery Act of 2008. Later that year, as the housing market deteriorated, the agency took quasi-public mortgage-securitizers Fannie Mae and Freddie Mac into conservatorship, which nationalized the former government-sponsored entities.
The FHFA has many roles, but among its most important is its obligation to "preserve and conserve" the assets of Fannie Mae and Freddie Mac. This means that the FHFA has a responsibility to run Fannie Mae and Freddie Mac as a business; with the hope that net income for the groups remains positive.
One way in which the FHFA keeps Fannie and Freddie profitable is via loan fees known as loan-level pricing adjustments (LLPA).
Initially introduced in 2008, LLPAs are extra loan fees charged to applicants whose mortgage traits are "risky".
A home buyer whose FICO score is 660 is a higher default risk than a buyer whose score is 740. Therefore, the buyer with the 660 FICO pays an extra loan fee. The high credit score buyer does not.
There are other loan traits which trigger LLPAs as well.
For example, purchasing or refinancing a multi-unit home (e.g. 2-unit, 3-unit, 4-unit); or, purchasing or refinancing an investment property; or, purchasing or refinancing a home for which the combined loan-to-value exceeds 75% LTV can add to a borrower's cumulative LLPA loan fees.
A new 10 basis point LLPA will be assessed to all loans beginning next spring. Many lenders will reflect the change even sooner than that.
Guarantee Fees : Rising In "Foreclosure High-Cost" StatesGuarantee fees were once an esoteric element of the mortgage business. Through the last few years, though, they've moved into the (semi-)mainstream consciousness -- most notably after Congress added a 10 basis point "G-fee" hike to help fund last year's U.S. budget.
A G-fee's primary function is pay for the pooling, servicing and selling of a mortgage-backed bond. However, they're also used to pay for the cost of credit default protection. Like an insurance policy, g-fees help protect the FHFA when loans go bad.
This is why high-risk loans carry higher costs at closing -- protection against credit default costs more and the FHFA is required to "conserve" its assets. It's also why the FHFA is raising its g-fees yet again.
In looking default and foreclosure data from all 50 states, the government deduced that the cost of a default to the FHFA varies by location, based on local law. In some states, the process of foreclosing on a home in default is simple. In other states, the process is arduous.
In the latter set of states, g-fees collected don't cover the true costs of foreclosing on a home. So, to align these homes with their true cost to insure, the government will raise g-fees by 25 basis points in the following four states :
- New York
- New Jersey
If any of these 4 states reform its laws to shorten foreclosure timelines or to reduce default costs, the FHFA would likely remove its state-specific guarantee fee. A 25 basis point increase will raise retail mortgage rates by as much as 0.625 percentage points.
The FHFA also announced the removal of its 25 bps adverse market fee. This will move rates lower.
Mortgage Rates To Rise From New G-FeesHigher g-fees are coming and, with each g-fee increase, mortgage rates rise. Some lenders have already added the fees to their rate quotes. This is why the best way to get low mortgage rates may be to lock your mortgage rate now.
Mortgage rates may "improve" between now and March, but the effect of new g-fees pits shoppers against the government. The tax of new fees will raise your rate dramatically.
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