The Adverse Market Refinance Fee, announced in August 2020, was to take effect on September 1, 2020. However, in a last-minute announcement, the Federal Housing Finance Agency (FHFA) has delayed the additional fee until December 1, 2020.

The new fee will add 50 basis points, or 0.5%, to each transaction for:

  • limited cash-out refinances; and
  • cash-out refinances.

Refinance loans with balances below $125,000 will be exempt. Affordable refinance products, Home Ready and Home Possible products will also be exempt. The fee will go into effect for applicable loans purchased or delivered into mortgage backed security (MBS) pools on or after December 1, 2020.

The FHFA oversees the government enterprises Fannie Mae and Freddie Mac, thus the new fee will impact most mortgages. Since lenders package and sell their loans to Fannie Mae and Freddie Mac, the fee initially impacts the lender. However, lenders will pass the charge along to borrowers in the form of higher interest rates.

In fact, mortgage loans of all types — purchase and refinance — saw their interest rates rise in August after the additional fees were announced to take effect in September. Following the announcement that the fee will be delayed until December, these interest rates fell back.

Balancing budget with borrowers

The FHFA claims the refinance fee is necessary to make up for the enterprises’ projected losses of over $6 billion due to COVID-19. This includes:

  • $4 billion in projected losses due to forbearance defaults;
  • $1 billion in losses due to the foreclosure moratorium; and
  • $1 billion in servicer compensation and other forbearance expenses.

Days after the announcement to delay the refinance fee, the FHFA also announced its extension of the foreclosure moratorium through the end of the year.

These additional costs need to be accounted for; hence, the refinance fee. With record low interest rates, refinancing has been a saving grace for many lenders, who have needed to contend with dwindling home sales volume and reduced loan originations.

However, the FHFA’s attempt to recoup some of its losses backfired, sending interest rates higher and reducing buyer purchasing power, discouraging homebuyers and refinancers alike. This action is the opposite of what today’s low interest rates are meant to do: encourage borrowing and keep the housing market afloat.

With media reports of record job gains each month, it’s easy to forget: we’re still in a recession. These record job gains have followed steep job losses, and we still need to regain millions of jobs here in California to return to the pre-2020 peak. As of June 2020, we were still 14% below this recent peak.

Therefore, the FHFA’s decisions to delay its new fee and extend its foreclosure moratorium are necessary. In fact, as the 2020 recession continues to hammer our economy, these implementation dates may end up being pushed off even longer. Other state laws, like AB 2501, may also be enacted to extend foreclosure moratoriums.

Keep reading for more updates as the recession continues to reshape the housing and lending landscape in 2020 and the years ahead.