An Explanation of the FHFA Adverse Market Refinance Fee
In August of this year, the FHFA announced that all lenders would need to implement a 50 basis point fee on all refinances due to the adverse market effects of the COVID-19 pandemic. What does this mean for you, the consumer? Well, in short, it means you will pay more for a refinance. However, there is still time to avoid the fee. First, though, let’s talk about what this fee is and why the FHFA has decided to implement it.
Who are the FHFA, Fannie Mae, and Freddie Mac?
The FHFA (Federal Housing Finance Agency), who currently holds in conservatorship Fannie Mae and Freddie Mac, is a federal regulation authority whose purpose is to ensure government-sponsored programs run safely and smoothly. Because Fannie Mae and Freddie Mac are in conservatorship, it is the responsibility of the FHFA to ensure that both entities remain financially solvent.
What is the Adverse Market Refinance Fee?
Because of the COVID-19 pandemic’s blow to the global economy, more borrowers have entered into forbearance agreements on their loans. The 2020 CARES Act ensures that any borrower who is financially affected by COVID-19 is eligible for forbearance. Due to increased job loss or illness, Fannie Mae and Freddie Mac secured loans have seen an unprecedented amount of loans in forbearance, meaning they are not receiving payments on these loans. This reduction in income puts the enterprises in a more difficult position in ending the FHFA conservatorship. The solution was then to institute a fee on any refinances over a certain threshold.
Why is there a Fee on Refinances?
Also, due to the COVID-19 pandemic, the market has seen an unprecedented drop in interest rates. Interest rates even hit historic lows, meaning they have never been this low in our country’s history! These low rates led to increased demand for refinances, especially in markets with high home values. Since lenders would be processing unusually high amounts of these loans, the FHFA decided a fee on refinances would generate enough funds to offset the adverse market effects.
Does the Adverse Market Refinance Fee Apply to All Refinances?
No. The Adverse Market Refinance Fee excludes refinances below $125,000, and any refinances using the Home Ready or Home Possible programs. However, that is just a small portion of refinances. The majority of new refinances would be charged with the new fee.
How Much is the Refinance Fee?
The Adverse market Refinance Fee is for 50 basis points or 0.5% of the loan amount. The fee may not seem like much, but on refinances of $250,000, for example, it amounts to an extra $1250 refinance cost. $1250 can make a huge difference, especially when you could use that money to buy down your refinance rate further.
Can I Avoid the Refinance Fee?
That depends on the time you are reading this article. At the time of publishing, the FHFA had delayed the implementation of the Adverse Market Refinance Fee until December 1st. However, since loans can take up to 60 days to fully process, lenders will have to start charging this fee early to avoid penalties later on.
On Q Financial is holding off as long as possible so that any refinances locked through September 30th are not charged the Adverse fee. If you were reading this when it was initially published, you might have a chance to avoid the fee if you act quickly. Otherwise, you will have to calculate the extra 50 basis points into the cost of your refinance.*
* Loan must close by December 1st
* Information is subject to change without notice. This is not an offer for extension of credit or a commitment to lend. Some restrictions may apply.
About the Author
Before opening On Q Financial in 2005, John Bergman originated and funded 450 units a year as a loan officer. He founded the company with just $1M of personal life savings—committed to his vision for building the best independent mortgage organization in the industry.View John's Profile