Today we’re talking about the adverse market fee – what is it? Why should you care about it? And what does it mean? Now, we’ve talked a lot about the housing market, mortgages, and debt in general as we straddle the line between COVID-19 and post-COVID-19 business closings. There is no doubt that the economy and housing market have taken a beating and a frightening number of Americans are going to find themselves in a very precarious housing and employment situation in the near future (if they aren’t already). And, as it turns out, that situation is going to get a tiny bit worse for homeowners looking to refinance in an attempt to keep their heads above water.
Adverse Market Fee – Are You In For a Surprise From Your Mortgage Co.?
For many families, the option to refinance their home mortgage is the only hope they have of righting their financial course as they face unexpected medical expenses and unemployment due to COVID-19. For some, the idea of refinancing is a “Hail Mary pass” in an attempt to try and scrape by (let alone rebuild!). With the knowledge that so many will be financially broken and seeking relief in refinancing, though, mortgage companies – two in particular – are implementing an “emergency fund” of their own. The adverse market fee.
The adverse market fee goes into effect on September 1st, 2020, and is being charged by Fannie Mae and Freddie Mac on all refinanced mortgages. The fee, which will be 0.5% of the total mortgage amount is being labeled a “modest fee” by the lenders, but for those in a financial panic, it’s just another expense they can’t afford.
The lenders explained that the newly added fee is intended to “protect against risk and losses due to coronavirus-related economic uncertainty. They say it’s necessary to help pay for the support they have provided homeowners through forbearance programs and moratoriums on foreclosure and evictions.” (Source) In a joint statement, Freddie Mac and Fannie Mae representatives claim that this added fee will help them to continue providing support for families as the economy continues to struggle as a result of COVID-19.
But, I hear you saying, “Fannie Mae and Freddie Mac don’t lend directly to mortgage holders”, and you are correct. Both Freddie Mac and Fannie Mae purchase mortgages from lenders and repackage those mortgages for investors. So, who pays the adverse market fee? It will be charged to the lenders and according to Freddie Mac and Fannie Mae, the fee won’t cause mortgage payments to increase for homeowners. Their reasoning? Refinancing lowers mortgage payments so an additional fee passed on to the mortgage holder by the lender will simply mean less savings and not an increased payment.
Mac and Mae CEO’s also say that there is no need for lenders to pass on the added cost to borrowers because they will be profiting from the incredible surge in refinancing due to the record low-interest rates. They say that lenders also have the choice as to whether or not they will pass the adverse market fee on to homeowners.
What are the chances that lenders are going to absorb the cost of the adverse market fee? The lenders who went through the exact same pandemic as Fannie Mae and Freddie Mac. The lenders who also had to support borrowers who were in financial crisis due to Coronavirus. The lenders who are in crisis themselves due to missed mortgage payments left and right. Not likely.
So, while Fannie Mae and Freddie Mac try to sidestep the fact that they are dipping into borrowers’ pockets by charging lenders, they know full well that the cost is going to get passed along to borrowers only it’s the lenders who are going to be painted as the villain.
So will all mortgages refinanced through Freddie Mac and Fannie Mae have the adverse market fee tacked on? For the most part, yes. The exceptions being:
- Your mortgage was locked in before the adverse market fee was announced on August 12th.
- You are getting a jumbo loan (and paying higher rates on your loan)
- You are getting FHA, VA, USDA Rural, or any other type of loan that doesn’t conform to Fannie Mae or Freddie Mac standards.
Chief financial analyst at Bankrate, Greg McBride, balked at the announcement of the adverse market fee. His stance – there are very few “bright spots” in the market for anyone right now and Fannie Mae and Freddie Mac are dampening that bright spot with their new fee. So the savings that refinancing borrowers were going to bring home and eventually pump back into the economy has been reduced. Fannie Mae and Freddie Mac claim that this is a necessary step for them and it’s a crucial step in their getting out of the government conservatorship they were placed in after the 2008 global financial crisis. The general consensus of just about everyone else? This was a very poorly timed fee that should not have been made a priority at a time when so many other issues should have come first.
Despite the opposition that the new fee has faced from lenders, borrowers, leaders, and consumer groups, Fannie Mae and Freddie Mac aren’t backing down and within a week they will begin to profit off lenders while everyone else in the market is stretching their limits to accommodate families in need.