The COVID-19 pandemic has resulted in an unprecedented global health crisis that has impacted millions of consumers. While the U.S. housing market has subsequently recovered over the preceding few months when the pandemic was declared, initially providers faced major headwinds.
Consequently, a record number of borrowers took advantage of mortgage relief first offered in the first half of 2020. At its peak, 4 million U.S. mortgages were in forbearance, equating to roughly $1 trillion in mortgage debt1.
Liquidity and lending standards were both additional issues that stemmed from actions taken at the start of the pandemic. As a response, government-sponsored entities Fannie Mae and Freddie Mac both instituted an adverse market refinance fee to help mitigate risk factors associated with enhanced risk in the market.
If you were waiting to see the market stabilize before refinancing or simply couldn’t afford to refinance during the early part of 2020, here is how you can benefit from the elimination of the adverse market refinance fee.
What Was the Adverse Market Refinance Fee?
The adverse market refinance fee was a fee that the Federal Housing Finance Agency (FHFA) implemented in the later part of 2020. Its purpose was to help offset the increased costs and risk associated with the high volume of mortgage applications amidst the ongoing COVID-19 pandemic.
Both government-sponsored entities issued forecasts for the costs they planned on absorbing because of the pandemic. In total, they projected $6 billion in losses for various reasons including forbearance defaults, moratorium losses, and lost servicer compensation or other forbearance related expenses2.
Represented as a percentage of your overall loan amount, the fee equated to 0.5% of your overall loan balance which would then be added to your total refinance costs. For example, if you were looking to refinance a loan for $100,000, you would be charged $500 on top of the regular applicable closing costs.
Historically speaking, this was not the first time an adverse market fee was established. After 2008, both Fannie Mae and Freddie Mac assessed an adverse market fee due to challenging housing market conditions until it was eliminated in most states in December of 20133.
Why Was the Adverse Market Refinance Fee Removed?
The adverse market refinance fee was implemented to help offset tangible costs associated with economic uncertainty brought about by COVID-19. However, the national economy has slowly recovered over the last few months making the need for the fee no longer feasible.
Key economic factors indicate that unemployment is improving across the country. In June, the Bureau of Labor and Statistics found that notable job gains occurred, with the rate hovering around 5.9% and down from the previous highs in April 20205.
Similarly, the number of borrowers in loss mitigation programs, including mortgage forbearance, have decreased dramatically compared to the previous year.
Fannie Mae and Freddie Mac both reported that about 5% of borrowers were utilizing mortgage forbearance programs near the height of the pandemic4. However, that number has dropped by over half midway through 20214.
Additionally, eliminating the adverse market refinance fee will help expand affordable housing initiatives that the FHFA is trying to prioritize.
How Do You Benefit from This Policy Change?
There are many reasons why eliminating the adverse market refinance fee is a good idea. Most notably is the fact that removing the extra fee should help with the growing affordability problem lingering in the market.
House prices are growing at record rates and mortgage rates are near all-time lows. Coupled with low inventory, many homebuyers are finding that they are being priced out of the market.
One of the goals for removing the adverse market fee is to help make home ownership more affordable. It should also help you if you are a real estate investor looking to refinance a mortgage against a property that is not your own home.
While the initial implementation of an adverse market refinance fee seemed justifiable and with precedent, key market indicators point to a recovering economy rendering the need for the fee mute.
According to the FHFA, in April only about 2% of single-family mortgages guaranteed by Fannie Mae and Freddie Mac remained in forbearance programs.
This trend can, in part, be an indication that both agencies have done an adequate job of reducing the impact of the pandemic on U.S. households, further strengthening the argument for removing the surcharge.
Ultimately, eliminating this pricing adjustment will help more families take advantage of lower mortgage rates, subsequently saving more money. The new policy will go into effect for loans delivered on or after August 1, 2021, so that borrowers can start taking advantage of the additional benefits as soon as possible.
1 Mortgage Forbearance and Performance during the Early Months of the COVID-19 Pandemic. (2021, February 08). Retrieved July 23, 2021, from Freddie Mac website: http://www.freddiemac.com/research/insight/20210208_mortgage_forbearance_rate_during_COVID-19.page?
2 Tankersley, A. (2021, January 28). The Adverse Market Refi Fee, explained. Retrieved July 23, 2021, from https://www.statestitle.com/resource/the-adverse-market-refi-fee-explained/
3 Federal Housing Finance Agency, Public Affairs. (2015, April 17). Results of Fannie Mae and Freddie Mac Guarantee Fee Review [Press release]. Retrieved July 23, 2021, from https://www.fhfa.gov/media/publicaffairs/pages/results-of-fannie-mae-and-freddie-mac-guarantee-fee-review.aspx
4 Olick, D. (2021, July 17). Mortgage refinance fee dropped by regulator, lowering costs for borrowers. Retrieved July 23, 2021, from https://www.cnbc.com/2021/07/16/fannie-and-freddie-drop-mortgage-refinance-fee-lowering-costs-for-borrowers.html
5 U.S. Depart of Labor, Bureau of Labor Statistics. (2021, July 2). The Employment Situation – June 2021 [Press release]. Retrieved July 23, 2021, from https://www.bls.gov/news.release/pdf/empsit.pdf