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Refinancing your loan?

September 25th, 2020 8:24 PM by Sam Kader

If you are in the refinancing process currently, there is a tremendously important development to be aware of. The culprit is new "adverse market fee" announced for all refinances guaranteed by Fannie Mae or Freddie Mac on of after December 1st 2020. In order for you to avoid that potential rate or fee increase, your loan need to close by mid-to-late October. This fee would result in rates moving higher by 0.125% to 0.25% or in additional closing cost equal to 0.50% of the loan amount. What makes this  adverse market fee different is that we know ahead of time that it's coming for certain.  

A bit of a background on guaranty fees - Fannie and Freddie Mac are two Government Sponsored Entities (GSE) that provide liquidity and that guarantee timely payment of principal and interest to the investors who front the money that finances the American mortgage market. This guarantee means that more investors are willing to participate and at more advantageous  rates for homeowners.  Naturally not every mortgage is repaid perfectly. Sometimes payments are missing and in more serious situations,  loans can end in foreclosure, short sales etc. In those cases the housing agencies are there to act as a backstop ensuring investors are made whole. In order to foot that bill, Fannie and Freddie collect fees on loans that are guarantee. These fees are called Guarantee Fees or G-fees. There are G-fees that you see and those that you don't. 

 If you are quoted  a higher rate because you have a lower credit score, higher loan to value or are buying an investment property - then your loan is inherently riskier. The GSE will require more money to guarantee your loan. You can either pay more upfront in terms of points or pay a higher rate. But even if you are a perfect borrower with an 800 credit score putting 40% down on an owner occupied Single Family Home, the GSEs are still collecting G-fee; you just won't see it because it will come off the top of every interest payment every month. G-fees have risen and fallen over the years especially after the financial crisis. The average G-fee is about 50 basis points or 0.50% of the loan amount. It was quite a shock when the GSE announced another 0.50%  G-fee hike on August 12th.

The adverse fee will continue working its way through the industry in the coming weeks. No lender is immune to this fee. Currently there's a certain level of uncertainty regarding the number of loans that will meet the cut off date of December 1st 2020 for this fee. This uncertainty is forcing lenders to widen their margins even if only slightly. 

What are your options at this point?  First off, it may already be too late. More than a few lenders have already reinstated the fee. Others have announced cut-off dates for certain lock periods. For example, if you want to lock your rate for 45 days, you must lock your rate by September 27th and if you want to lock your rate for 60 days, it must be locked by September 12th. Time is the essence.  As lenders accept more applications and locks, some will be forced to reinstate the fee earlier than anticipated for longer turn times.  Most lenders are slammed right now and their turn times have stretched out twice as long for underwriting and closing.  Talk to you preferred lender and inquire if you can still lock-in your rate without factoring in the adverse market fee.  

Posted by Sam Kader on September 25th, 2020 8:24 PM



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