The last two times Fannie Mae and Freddie Mac instituted an adverse-market fee to compensate for a riskier lending environment, during the run-up to the financial crisis more than a dozen years ago, lenders got plenty of warning.
The announcements came more than two months before the implementation dates, giving mortgage brokers and loan officers lots of time to adjust their pricing. Back then, the first fee was a quarter of a percentage point, and a few months later it was doubled as the economic threat became clearer.
This time, the initial announcement gave lenders less than two weeks. That wasn’t enough time to change the pricing for loans that were already locked, meaning some lenders would be paying the fee themselves instead of passing it on to consumers, resulting in millions of dollars in unexpected costs.
Then, on Tuesday, a second announcement came: The Federal Housing Finance Agency said it was postponing the implementation of the fee to Dec. 1. Some lenders will have to reverse the extra cost out of deals that aren’t already locked. For some borrowers, it’s just too late. The average cost for consumers is $1,400, according to the Mortgage Bankers Association.
“Markets need time to plan and react,” said Mark Goldman, a loan officer with C2 Financial in San Diego who signed his own refinancing on Tuesday, paying the fee hours before the FHFA announced it was delayed. “When you’re making policy that impacts a lot of people, and it’s a significant amount of money at stake, the planning should be better.”
Goldman said he won’t get the money back. But, he pointed out, rates have gone up slightly in the last week, so even if he had found out in time and pulled out of the deal, he would have ended up paying more.
The decision to delay the fee came after an outcry from more than 20 industry and consumer groups, including MBA. Even the White House criticized the fee, with an unnamed Trump administration official telling the Wall Street Journal there were “serious concerns” about it.
So, why the chaos? Stephen Myrow, managing partner at Beacon Policy Advisors in Washington, said you can chalk it up to deadline pressure. FHFA Director Mark Calabria is trying to free the GSEs from government conservatorship and knows his plans likely will be knocked off track if former Vice President Joe Biden is elected, Myrow said.
Biden, the Democratic nominee to take on President Donald Trump in the Nov. 3 election, is ahead in every major poll. In fact, no sitting president was as far behind in polling as Trump is during the Republican National Convention week, according to FiveThirtyEight, a political news website.
“Calabria sees the writing on the wall,” Myrow said in an interview. “The fate of the GSEs depends on the election.”
A June decision by the Supreme Court on a case that involved the director of the Consumer Financial Protection Bureau added more pressure: The fallout from the ruling that allowed the firing “at will” of the head of a single-director agency meant that Calabria’s position is uncertain in a new administration.
When the FHFA was set up in 2008 as the watchdog for Fannie Mae and Freddie Mac, the five-year tenure of the director who could only be fired “for cause” was seen as giving the agency some independence. After the high court’s ruling, a Biden administration could attempt to remove Calabria on day one.
“This is negative for the effort to remove Fannie Mae and Freddie Mac from conservatorship,” Jaret Seiberg, managing director of Cowen Washington Research Group said in a note to clients after the decision. “This means election risk is significant for efforts to end the conservatorship as Joe Biden could fire Mark Calabria as FHFA director on Jan. 20 if the Democrat wins the election.”
It all adds up to pressure to raise capital as part of the effort to free the GSEs, Beacon’s Myrow said. The so-called G-fees, as guarantee fees are known, are a lucrative revenue source for the mortgage guarantors, according to their earning reports. That helps them to raise capital, in addition to protecting them from risk.
The adverse market fee is on top of other risk-based fees known as loan-level price adjustments that the GSEs charge for loans to borrowers with low credit scores or not enough equity in a property.
“Calabria has a goal of freeing the GSEs from conservatorship, and he hasn’t seen the pandemic as a reason to reassess that goal,” said Myrow.
In mid-June, two weeks after the COVID-19 death toll passed 100,000 and forbearance requests were surging, Fannie Mae and Freddie Mac announced the Wall Street firms they had chosen to use as financial advisers for a future share offering, another step toward exiting their 12-year government conservatorships.
To some, including Myrow, it seemed tone-deaf. The FHFA did not respond to an email seeking comment on the timeline.
“In all these things, why the haste?” Myrow said. “The FHFA is trying to move the process forward prior to the election, even in the middle of a pandemic. They’re trying to lock in whatever they can.”
