The winds of change are blowing through the mortgage market, and they can impact you if you’re looking at refinancing your mortgage.
It’s called the adverse market fee, and it’s a change in how many lenders obtain a guarantee for the refinanced mortgages they offer. In short, for many lenders, it now costs more for them to be able to guarantee refinanced mortgages – think of it as your lender buying insurance against you failing to pay your mortgage.
What is the adverse market fee?
On December 1, Fannie Mae and Freddie Mac, which guarantee about half of the mortgages in America, began to charge an adverse market fee to the lenders that work with them on refinanced mortgages. This fee is a one-time charge equal to 0.5% of the loan amount.
Why are they doing this? In 2020, many people chose to refinance their home mortgages in response to financial difficulties. If someone lost their job, is dealing with illness or experiencing other issues, refinancing a mortgage is an easy short-term solution. However, someone who is in a difficult financial spot is at higher risk of defaulting on their mortgage. To protect themselves against having to pay out guarantees against many bad mortgages, Fannie Mae and Freddie Mac are choosing to put this new fee on refinances to help spread out their risk.
It’s important to note that people borrowing money for refinancing do not work directly with Fannie Mae and Freddie Mac — they work with the banks that you do borrow from, providing mortgage guarantees that minimize the risk to the banks of lending money on mortgages.
In essence, for banks and other lenders that work with Fannie Mae and Freddie Mac for mortgage guarantees, the cost of that guarantee went up significantly for refinances.
Who are Freddie Mac and Fannie Mae?
You may be asking yourself this question, and the answer’s pretty straightforward. Fannie Mae is a nickname for the Federal National Mortgage Association (FNMA), and Freddie Mac is a nickname for the Federal Home Loan Mortgage Corporation (FHLMC). Both the FNMA and the FHLMC are government-sponsored enterprises, which means they are organizations specifically created by Congress to provide some service to the public or to American businesses.
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In this case, both Fannie Mae and Freddie Mac exist in large part to keep the home mortgage market stable. They do this in several ways, but the biggest impact they have is that they guarantee mortgages, which means that, for a fee, they promise to buy mortgages from lenders if that mortgage ends up in trouble because the person borrowing the money is no longer repaying it. This reduces the risk for the lender, but at an up-front cost. Think of it as being like homeowners insurance — you pay for it just in case, but rarely have to use it. The cost for this mortgage guarantee is paid for by your lender, but then they wrap up that expense in the mortgages they offer you.
The adverse market fee is just an extra fee that Fannie Mae and Freddie Mac are charging to lenders if they use their guarantee service for their refinanced mortgages, which is true for about half of American refinances.
Who has to pay the adverse market fee?
Again, this new adverse market fee is not paid directly by someone refinancing their mortgage. Rather, it is paid by the lenders themselves — at least, the ones who use Fannie Mae or Freddie Mac to guarantee their mortgages. About half of the mortgages in America are guaranteed by either Freddie Mac or Fannie Mae, so it only directly affects those mortgages.
Who is exempt?
Any lenders who do not use Fannie Mae or Freddie Mac to guarantee their refinanced mortgages are exempt from this fee. However, other businesses who provide mortgage guarantees may choose to charge a similar fee or raise their rates, which means that any lenders using those other mortgage guarantors will have to face those extra costs as well.
How will the adverse market fee affect my refinance?
Unsurprisingly, most lenders will simply pass the cost of this extra fee along to borrowers. This will show up as either an extra initial fee of some kind or a slightly higher interest rate if you’re going to borrow from a lender who uses Fannie Mae or Freddie Mac to guarantee their mortgages.
What about the lenders who don’t use Fannie Mae and Freddie Mac? It depends entirely on what fees are passed to them by whatever mortgage guarantee companies they use. Without those fees, they’ll find it easier to compete, of course, but they’ll likely raise their refinancing fees and rates somewhat anyway to continue to match the market, as this change directly affects at least half of the market. If half of the market is now charging a new fee because they have to, chances are the rest of the market will begin to charge more, too.
How will the fee be implemented?
Again, this fee will remain essentially invisible to borrowers. What they will see at the end of 2020 and the start of 2021 is higher overall rates for refinancing, led by lenders that are pushed directly to raise their rates by the higher fees they’re charged by Fannie Mae and Freddie Mac, and then by the domino effect of other companies following suit, either for additional profit for themselves or because their mortgage guarantors added fees or raised rates.
Is now a good time to refinance?
Borrowers seeking refinancing of their mortgage at the end of 2020 and at the start of 2021 will likely see a mix of higher rates and higher fees than borrowers would have seen earlier in the year. Having said that, mortgage rates continue to stay at historical lows, so it’s not a bad time to refinance, especially if you’re refinancing an older mortgage with a higher interest rate.
The four big reasons to refinance your mortgage are if your credit score or financial situation has improved, mortgage rates have dropped, you need cash in hand from the equity in your home or you need to reduce your monthly payments. The only thing changed by the new fee is that you’re less likely to see a much better rate than you likely already have on your mortgage unless your mortgage is several years old. The other reasons remain unchanged, and refinance rates are still good, if not quite as low as they were throughout much of 2020.
If those reasons apply to you, it’s worth taking a look at the better refinancing companies out there and what rates are currently available for refinancing, though you’ll want to take a careful look at the additional fees they’re charging.