In a surprise release late last week, the Federal Housing Finance Agency (FHFA) announced it would impose a new 50 basis point “adverse market” fee on most refinance loans that go through Fannie Mae and Freddie Mac. Immediately, a coalition of groups from the housing lobby went on the offensive asserting the fee is an assault on lenders and borrowers. As is often the case, the housing industry is more interested in protecting their bottom line than ensuring the safety and soundness of the GSEs. Good on FHFA Director Mark Calabria for standing up and doing the right thing in the face of strong adversity.
The premise behind the new .5 percent fee is to insulate the GSEs from potential losses on the refinanced mortgages they guarantee. It’s no secret that the COVID-19 pandemic has taken a sledgehammer to the U.S. economy and continues to pose a significant threat to the livelihoods of millions of businesses owners and workers. Though the economy is technically in better shape than it was a few months ago, there is still much hardship in the months ahead that could cause significant harm. With so many small businesses on the verge of failure, no one knows for certain what the housing market, or even the entire global economy, will look like in the months ahead.
These uncertain economic conditions are not good for anyone, least of all for the two $6 trillion dollar, taxpayer-backed financial institutions. FHFA is right to be alarmed at the prospect of deteriorating market conditions and how it could impact the housing market and homeowners, as well as the GSEs. Considering the GSE’s hold thin capital buffers, even slightly higher than normal defaults could trigger a withdrawal from the U.S. Treasury, which is essentially a taxpayer-bailout. To get ahead of potential defaults, Director Calbaria is taking a proactive step to mitigate risk and protect taxpayers, and for that, he deserves much praise.
The new fee, as with everything in Washington, comes with trade-offs. The GSEs would benefit from more revenue which will pad its capital buffer, but on the other hand it will cost consumers who plan to refinance their loan. However, it remains to be seen how much the fee will actually impact consumers and whether or not some lenders would eat part of the fee instead of passing the entirety of the fee onto borrowers. Importantly, the fee takes effect September 1 and would not impact borrowers who have locked in rates prior to September.
We praise FHFA for prioritizing the safety and soundness of the GSEs, which is their ultimate statutory mission above all else. This small refinance fee, coupled with the eventual finalized capital rule, will ensure the GSEs remain well capitalized, resilient, and safe in the coming months and years ahead.