F&F Charge Higher Fees, Increases Ratesby Tim Manni
Two main proponents can most often cause an increase in mortgage rates: speculation or a change in policy. This month, Fannie Mae and Freddie Mac increased the fee they charge to lenders for most loans, due to result in an increase in interest rates to borrowers with mid-level credit. Fannie was the first to act, raising their fee by 0.5%, and Freddie was quick to follow with a similar increase:
This doesn’t mean every new consumer loan will increase by a half point, though. First, the policy applies only for borrowers with credit scores lower than 680. Credit rating agencies do not disclose “average” credit score figures, but the Fair Isaac Corporation, whose software is used by many credit rating agencies, said the median score was about 723.
Fannie and Freddie’s new policy will be especially felt by homeowners who wish to refinance. In recent months, fewer borrowers have been able to refinance due to increased lending restrictions and higher mortgage rates. The increased fee may result in a somewhat smaller number of homeowners who qualify for refi loans:
Even those with excellent credit will not be able to take cash out of their homes if, after the loan, they have less than 15 percent equity in the homes. Previously, the threshold was 10 percent, and people with low credit scores could not get such deals.
Rather than an attempt to raise extra capital, Fannie and Freddie have increased their fee in reaction to the abundant risk in the market:
One thing that indicates the extent of this risk, of course, is that by and large nobody but the GSEs are buying mortgage loans right now. When nobody else but the government-chartered investors are in the market, that can be understood to mean that risk is so high that nobody else is even feeling strong enough to be willing put a price on it. The absence of competitors in a market often suggests that risk has risen in that market. If you’ve ever tried to get flood insurance, you may have noticed this phenomenon.