New Fannie and Freddie Fees to Mitigate Mortgage Risk

It happens in the insurance industry all the time.  You have a car accident, then boom…your insurance company raises your auto insurance premiums.  The greater the risk…the more you pay for your insurance.  In the wake of the subprime mortgage crisis, that is exactly what is happening in the mortgage lending business.

Mortgage Lenders Move to Risk-based Pricing

Most borrowers looking to finance loans for new homes in 2008 will end up paying higher prices.  How much more?  A fee, amounting to about $250 for every $100,000 borrowed will be charged to home buyers across the board.  Fannie Mae calls this fee the “adverse market delivery charge.”  Freddie Mac refers to it as a “market condition delivery fee.” 

From there, more fees will be tacked on for buyers depending on their credit scores, the loan-to-value ratio and whether there is another loan piggy-backed onto the mortgage.  With a credit score below 620, those needing to borrow more than 70 percent of their home value will pay about 2 percent of the loan amount more (about $2,000 for every $100,000).  If the score is in the 640 - 659 range, the fee would be a bit lower, about 1.25 percent of the loan amount.  Less risk…lower fees.

Need a piggy-back loan with 10 percent down-payment? Regardless of your credit score, if you can even get such a loan, you will pay a quarter-point fee for it.

With borrowers already facing tougher credit restrictions, why are Fannie and Freddie charging higher fees?  As government-sponsored enterprises (GSE’s), they must collect fees to guarantee the bundles of loans they secure; that way, even if borrowers miss loan payments, investors still get paid. 

Lenders have the option to charge the fees at closing or to convert the fees into higher interest rates for those new home buyers who don’t have the extra cash available to pay them upfront.  As a rule of thumb, a one-point fee (a charge of 1 percent of the loan amount) converts to an increase of one-quarter of a percentage point in the interest rate. All conforming loans securitized after February 29, 2008, will include the new fees.  To give themselves some lead time for securitization, some lenders began levying the fees as early as November.

While the news of additional fees may seem discouraging for those shopping for home loans, many economists think moving the mortgage industry to a risk-based fee structure makes good business sense.  And it was the lack of such a structure that led to poor lending practices and the subprime mortgage mess.

The good news for new home buyers…mortgage interest rates dropped again last week.  Taking into account that home prices have fallen significantly in many markets across the country, even with the added fees, buying a new home may be more affordable now than it has been for several years.  Contact a qualified mortgage professional at New Homes Central Lending Services today to discuss your home loan options and get pre-qualified to buy that new home in 2008!

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