Refinancing Your Mortgage Is About To Get More Expensive

Amid historically low rates, refinancing is hot—though it got doused with some cold water on Aug. 12, when the Federal Housing Finance Agency announced a significant new fee: All refinances backed by Fannie Mae and Freddie Mac, which the FHFA oversees, would be subject to the Adverse Market Refinance Fee, equivalent to 0.5% of the total loan amount, starting Sept. 1. The fee is intended to help cover at least $6 billion of projected losses incurred by the Covid-19 crisis, the FHFA said in an August statement. Two weeks after the initial announcement, after an outcry from the mortgage industry, the FHFA revised its previous deadline, pronouncing that the start date for the fee would be Dec. 1.

Borrowers can be forgiven for thinking that if they refinance before Dec. 1, they will save a lot of money. After all, 0.5% of the total loan amount on a $765,600 loan—the highest conforming loan, called a “high-balance loan,” available in high-cost areas—is $3,828. If that were added up front as a closing cost, it might make a refinance so expensive it wouldn’t be worth it in some cases. Initiating a refinance now, well before the December 1 deadline, seems like a great way to save.

Unfortunately, the way the fee will affect refinances is quite different from how even a savvy borrower might expect.

“This fee is not going to show up on the loan docs,” said Joseph Flannery, chief executive of San Francisco-based Selfi.com, a digital mortgage broker. Instead, Fannie and Freddie charge lenders the fee when they purchase the loans. Lenders have the choice of whether to pass the cost on to consumers or not; most will likely pass it on in the form of higher mortgage rates, most industry experts agree. The fee will account for roughly a 1/8th of a percentage point rate increase on 30-year-fixed refinances, said Mike Fratantoni, chief economist for the Mortgage Bankers Association.

Are you planning to refinance soon, before the adverse market fee goes into effect?

Fannie and Freddie back only conforming loans, so jumbo-loan refinances—those above the conforming limit of $510,400 in most places and $765,600 in high-cost areas—are exempt from the fee, as are loan balances of $125,000 or less. Of course, in a refinance, a mortgage that began life as a jumbo, but has been paid down over the course of years, may now have a loan balance within conforming limits and will be refinanced as such. These borrowers shouldn’t be too depressed over the new fee: Even accounting for the uptick in rates it will cause, jumbo rates right now are generally at least a half-point higher, said Stephan Sabbah, loan officer with Greenday Mortgage.

Some conforming loan borrowers are already encountering higher rates caused by the fee, said Mr. Sabbah. Some lenders are anticipating not being able to sell the loans along to Freddie and Fannie until after the Dec. 1 deadline, so they have been pre-emptively pricing their loans to cover their added cost of business.

It took an average of 51 days to close a conventional refinance in August, according to mortgage technology company Ellie Mae, though it can take some lenders up to 90 days to close and sell their loans, Mr. Sabbah said.

The complexity of mortgage pricing makes it hard for borrowers to dodge the new fee. But brokers say these strategies, for a borrower willing to act immediately, can help get the best deal.

1. Comparison shop. Some lenders, especially those who take two months or more to sell off their loans to Fannie or Freddie, have already incorporated the fee into their pricing. Others, particularly lenders with quicker turnaround times, haven’t. “Between now and October 15, it is more important than ever to comparison shop,” to find the deals not yet ratcheted up by the fee, said Mr. Flannery. After October 15, borrowers can assume nearly all loans will be priced to account for the fee, he said.

2. Move fast. Lending programs vary greatly in how long they take to close a refinance, ranging from 15 to about 60 days, said Robert Cohan, president of Carlyle Financial, a broker in San Francisco and Beverly Hills. “The shorter the lock period, the better the deal you get,” he said. Short rate-lock periods require fast work on the part of the borrower: Upload pay stubs, tax returns, and everything else the loan officer wants the minute the rate locks and respond quickly to more requests. Right now, only salaried employees on W2s are securing 15-day closes; self-employed borrowers might need 60 days, Mr. Cohan said.

3. Pursue an appraisal waiver. Due to the pandemic, it is taking longer to get an appraisal: For example, in the Bay Area, they can currently take three weeks and cost $900, Mr. Cohan said. To avoid this, once a borrower has provided full documentation, Mr. Cohan runs the file through the Fannie and Freddie decision engine to see if it qualifies for an appraisal waiver, which makes a 15-day close a possibility. Customers who have already refinanced in the last year are the likeliest to get the waiver, Mr. Cohan said.

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