Mortgage rates should be lower. Not just because that would be great for real estate investors and homebuyers, but because lower rates better reflect financial realities.
One of those realities is that mortgage rates have been artificially inflated as a result of the government’s needless .5% Adverse Market Refinance fee (AMR fee), a fee that will end August 1st.
Will the end of the fee cause mortgage rates to drop a full half percent? No. The AMR fee is a one-time charge extracted from refinancing borrowers at closing. Once the fee is gone, lender costs will decline. In a competitive marketplace, lower costs are likely to be passed through to consumers, especially those with strong applications.
However, each little nudge downward gets us closer to a new record low. In early January, 30-year mortgage financing was available at 2.65%, the lowest rate on record according to Freddie Mac. In mid-July, the same loan was priced at 2.88%, down from 2.98% a year ago.
Given softening rates, strong competition, maybe less inflation than expected, and an end to the refinancing fee, it’s not unreasonable to think that rates can fall further and with a little luck maybe even into record territory.
So how did the Adverse Market Refinance fee come about? What is it, and why did it end?
The Adverse Market Refinance fee
In 2008, Fannie Mae and Freddie Mac — two government-sponsored enterprises or GSEs — were taken over by the federal government. This was just weeks after it was announced that the two companies had “large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets.”
In return for its assistance, the Treasury began to extract profits from the GSEs — almost $110 billion according to ProPublica. Also, knowing a cash cow when it sees one, Congress passed the Temporary Payroll Tax Cut Continuation Act of 2011, a .10% fee paid by mortgage borrowers that is now gone.
The 2020 Cash Grab
Having extracted so much money from the two GSEs, it apparently occurred to someone that the companies lacked the reserves needed to pay off investor claims. Such claims might be expected to soar in 2020 because of the pandemic and its related economic downturn.
The result was that last August 12th, both Fannie Mae and Freddie Mac posted announcements saying that a new .5% fee would apply to all refinancing mortgages sold to the GSEs as of Sept. 1st.
The announcements were greeted with appropriate responses. The Mortgage News Daily headline read, “Agencies Drop a Bomb; Your Refi Just Got Much More Expensive!”
“In what can only be described as a cash grab,” said the Mortgage News Daily, “Fannie and Freddie just announced a new tax on refinances. Granted, it’s not technically a tax, and it wasn’t probably even intended to hit the pocketbooks of the American homeowner, but that’s unfortunately exactly what it will do.”
There were big problems with the fee announcement.
First, borrowers with pending loan applications were being hit with a new fee that some invariably could not afford. A $250,000 refinance would mean another $1,250 in loan charges or – more likely – a mortgage rate that might be an eighth to a quarter percent higher than expected.
The practical result of higher rates is this: A borrower who financed a $250,000 mortgage at 3% pays $1,054 per month for principal and interest. At 3.125% the monthly cost rises to $1,071 and at 3.25% the monthly expense increases to $1,088. These changes seem small, but they mean an extra $204 to $408 per year as long as the loan is outstanding.
Second, organizations on all sides of the financial spectrum — from the American Bankers Association to the Consumer Federation of America — signed a joint statement condemning the new fee. They strongly urged the Federal Housing Finance Agency (FHFA) — Fannie Mae’s and Freddie Mac federal regulator and the fee’s real author — to withdraw the “ill-timed, misguided directive.”
“Mortgage rates in general — not just for refinancing — suddenly rose,” said Rick Sharga, Executive Vice President with RealtyTrac. “According to NerdWallet, 30-year mortgage rates went from 3.096% on August 11th to 3.171% on August 12th. All borrowers were suddenly facing higher costs as a result of the fee, not just those refinancing.”
Stunned by an outpouring of common sense, FHFA delayed introducing the fee until December 1st. It also announced that the fee would not apply to refinancing loans for $125,000 or less.
Meanwhile, the avalanche of investor claims never happened.
According to ATTOM Data Solutions, RealtyTrac’s parent company, foreclosure activity in the first half of 2021 reached an all-time low.
“There were a total of 65,082 U.S. properties with foreclosure filings — default notices, scheduled auctions or bank repossessions — in the first six months of 2021,” said ATTOM. “That figure is down 61 percent from the same time period a year ago and down 78 percent from the same time period two years ago.”
FHFA had obviously created an unneeded fee, but kept it in place — until now.
FHFA — under new management and in a surprise announcement — has dumped the Adverse Market Refinance fee as of August 1st. You can bet that a lot of refinancing will be delayed until next month.
And, no surprise, mortgage rates instantly went down with the fee’s end. According to Mortgage News Daily, 30-year rates stood at:
· 3.04% on Thursday, July 15th,
· 2.97% on July 16th – a Friday and the day the FHFA announcement was made, and
· 2.89% on Monday, July 19th.
Mortgage rates are the byproduct of many factors, but going forward borrowers will at least be able shop for financing without the Adverse Market Refinance, a mistake from the moment it was announced.