The Federal Housing Finance Agency (FHFA), which is a federal agency that regulates Fannie Mae and Freddie Mac and sets policy with regards to loans made by them, has been requiring Fannie and Freddie to implement gradual increases in fees. This is being done to move their pricing closer to the level you would see if mortgage credit risk were borne solely by private capital.
On December 9th, the FHFA announced the most recent changes to fees by directing Fannie Mae and Freddie Mac to implement the following:
- The base guarantee-fee will be increased by 10 basis points.
- The up-front risk-based delivery fees (i.e. LLPAs) will be updated to better align pricing with the credit risk characteristics of the borrower.
- The up-front adverse market fee 25 basis point that has been assessed since 2008 will be eliminated, with the exception of four states (CT, FL, NJ and NY).
These new fees must be in place by April 1st, 2014. Below I will discuss the affect each of these will have on San Diego Mortgage Rates.
Increased Guarantee Fee
A guarantee fee is collected to cover the cost of features in a loan that increases the security of that loan to an eventual purchaser. It is similar to the mortgage having insurance on it.
The problem is that every increase of 10 basis points in guarantee-fees or G-fees as they are called will raise interest rates on average by.125% or .5 Points in cost. The higher fees can also affect loans that were locked before the increase took place, if that lock needs to be extended. The cost of those extentions will be higher because the G-fee increase needs to be built into them as well.
This will be the third time in the last several years that the G-fees have been increased. Each time, it has caused issues in the market. If you would like to get a free quote and lock in your interest rate before these changes occur, click HERE.
The hope is that these fee increases will help price Fannie Mae and Freddie Mac loans more in line with privately backed mortgage securities and hopefully encourage more participation in the market by privately backed lenders.
Increased Up-Front Risk-Based Delivery Fees
The change to the up-front risk delivery fees will have a major impact on rates. I have included a chart below that shows the impact of the changes based on credit score and loan to value.
For example, a borrower who has a 740 Fico score and will be putting 20% down, will pay .5 Points more in March to get the same rate they can get now. A borrower with a 720 Fico will pay .75 Points more in cost and a borrower with a 730 score and 10% down payment will see a whopping 1.5 Point increase.
If a borrower does not want to pay the points, they will have to settle for a higher rate.
With regard to the increased fees, the Mortgage Bankers Association published a detailed analysis which shows the most punitive impact will be for loans with a loan to value greater than 70% and up to 780 credit score.
It appears that most lenders will be implementing these changes beginning in early March so that the fees are in place for any loans sold to Fannie Mae or Freddie Mac by the April 1st deadline.
There is no doubt that mortgage rates in San Diego will be higher in 2014, not only due to the market fluctuation with the Fed tapering its bond buying, but due to these pricing adjustments being implemented. If you have been on the fence about buying a new home, please use this information to make a decision so you can lock in the lowest rate possible.
The Elimination of the Up-Front Adverse Market Fee
This is the only good news to come out of the recent announcement. Since the mortgage meltdown, every file was being hit with a .25 point adverse market fee as part of the pricing adjustments. This fee is now gone for every state except 4.
This will help offset the G-fee increase and up-front risk delivery fee a little. In the end, depending on your credit score and loan to value, you will still see higher rates.
As a San Diego Mortgage Broker, I know that you can never predict the future or know which direction rates will go for certain, but the writing seems to be on the wall at this time. Hopefully something will change that.
If you would like to ask me any questions or look at getting pre-approved, feel free to call me at 619-312-0612.