Home prices may be down, but the cost of your home loan is headed up, up, up according to Fannie Mae’s memo to lenders in late December. In the New Year, the government-controlled GSE will impose a new schedule of higher add-on fees similar to what Freddie Mac implemented around Thanksgiving 2010[1]. The result will be that loans themselves will actually cost thousands more in some cases – even if the borrower boasts high credit scores and a substantial down payment.
The fees, which are based around the perceived risk in loaning to a borrower, start at the top and will apply even to people who previously were able to qualify for low-cost and no-cost loans thanks to good credit and cash on-hand. For example, a borrower with an 800 credit score and 25 percent of a down payment will still be paying an additional quarter of a percentage point on the sum of the loan amount in most cases, whereas in 2010 this great-looking borrower would have had a zero-cost loan due to their virtually nonexistent risk of default. Higher-risk borrowers and those with lower down payments will likely see multiple percentage points added to the costs of their loans.
Additionally, both GSEs will be adding costs to loans based on the type of real estate you wish to purchase. For example, a loan on a condo will be more expensive than a loan for the same amount on a standalone house. Rental investments will get “significantly higher costs” according to reports. These government lenders have already required $150 billion in government “financial infusions” since 2008, and they continue to fund or guarantee more than two-thirds of new mortgages. Real estate analysts have voiced concerns that these new add-ons could dramatically slow an already-sluggish market recovery, but Edward J. DeMarco, acting director of the Federal Housing Finance Agency, calls the additional fees “necessary to protect [the GSEs] from costs and risks inherent in the mortgages they buy or guarantee” in an open letter to “Capitol Hill critics.” Essentially, he added, these fees are to make up for the GSEs’ “underpriced mortgage credit risks” during the first half of the past decade.
This year Congress and the administration are supposed to determine whether or not the time has come to phase Fannie and Freddie out completely. Do you think it’s time for them to go?
Thank you for reading! Your comments and questions are welcomed below.
[1] http://www.washingtonpost.com/wp-dyn/content/article/2011/01/07/AR2011010702067.html
I agree Fannie and Freddie are doing some ridiculous things. But if they don’t exist, who will buy or guarantee the mortgages? If they are replaced, we will likely just get a new version. In terms of additional fees for different types of properties or borrowers, why shouldn’t they do that IF they have determined that these types of properties or borrowers have a proven record of greater chance of default? No one wants higher fees but this may just be a smart business decision on the part of the GSE’s.
Although Fannie Mae and Freddie Mac have really screwed things up, we can’t just get rid of them without replacing them with some other entity that will back up all the mortgages that they are now, and in the future would do. So it’s best to try to change/improve both organizations.
This certainly doesn’t seem to be a good thing for homeowners or anyone including investors purchasing property. It seems like a penalty has been put on homeowners and anyone buying a home or an investment property like it was the homeowner or investor’s fault for what created this problem in the first place. How unfair is that?
I can’t wait for it to happen, and I’m looking forward to it. One reason I’m looking forward to it is…”Lease With Option To Own Agreements” these beautiful contracts will be all too easy to seal and deal. You probably thought I was going to post a longer comment. Nope not this time.
It seems to me that if Fannie and Freddie were phased out, this could discourage home ownership..fewer home mortgages would be approved by lenders because of the additional risk!
in Miami, Fort Myers and other places where some are actually predicting a housing recovery in 2011 I think this might actually help in that people will want to buy before the rates increase and the fees kick in. Unless something odd happens, it seems that the deals one sees this season will not be here the next. We shall see if the snow birds heed that and buy or get caught short in the end.
Give me a break …. when were we so duped into believing everything we do/have must be insured. When a disaster takes place who will end up picking up the final costs? Your Government which is the taxpayer…you! Mortgages? (who bailed them out!) Healthcare? (your costs just went up 40% to cover insurance company costs and profits) Nothing is free but believing your mortgage insurance somehow benefits you in any way is a falicy. They are a for profit business as well as insuring the financial institutions that has already been bailed out with YOUR money. Hello? If you care to check it out read “The Invisible Bankers” author Ken Tobias subtitled Everything the Insurance Industry Never Wanted You to Know” Printed years before this latest crisis.