Adverse Market Fee – A Surprising GSE Directive

It was a typical Wednesday after dinner two weeks ago when I got a notice about the unexpected news:

Government Sponsored Enterprises (GSE), Fannie Mae, and Freddie Mac announced a directive known as the Adverse Market Fee. This directive will impose a 0.50% fee on all refinances. These agencies have scheduled the directive to go into effect on September 1, 2020. In the midst of handling my usual evening routine of organizing my work for the next day, I was scrambling to handle phone calls and emails to not only understand this directive but answer questions for my clients and partners who were trying to make sense of what was happening.

Since that time, a consortium including public interest groups, housing organizations, and financial services industries responded to this surprise directive. As a result, the agencies have delayed this directive until December 1, 2020. Additionally, the GSEs will modify the directive to exempt refinance loans with loan balances below $125,000.

Adverse Market Fee Frequently Asked Questions

We have answered some  frequently asked questions regarding this directive:

Government Sponsored Enterprises?

The United States Congress created financial services corporations known as Government Sponsored Enterprises (GSE). Essentially, these entities such as Fannie Mae and Freddie Mac work as financial intermediaries to assist lenders and borrowers in housing and agriculture.

Don’t GSEs require a bill or approval by Congress?

This is an interesting question. First, let’s review a little history.

Fannie Mae and Freddie Mac were chartered to manage liquidity in the mortgage market. In 2008 due to financial turmoil, the Federal Housing Finance Agency (FHFA)  took the GSEs into conservatorship to help bring stability.

Additionally, FHFA has the role to take actions necessary to keep the regulated entity sound and solvent and appropriate to carry on the business to preserve and conserve the assets and property of the entity.

Essentially, the charter is to reduce risks to the government, taxpayers and homeowners. In this context, the GSEs have the ability to make this decision without the approval of Congress.

For a detailed understanding of these entities, read the Congressional Research Service report (PDF 1.2 MB) about Fannie Mae and Freddie Mac in Conservatorship.

Why did the GSEs implement this fee?

The short answer is the intention of the Adverse Market Fee is intended to cover projected COVID-19 losses of at least $6 billion at the Enterprises. Please see the FHFA press release for more details.

How does Adverse Market Fee my refinance?

This answer depends on the amount a consumer is refinancing. For example, an additional fee of 0.5% on refinances would result in an additional cost of $1,750 for a $350,000 mortgage refinance.

Why did the Adverse Market Fee get delayed?

As a consequence of the shaky economy and job security, many have criticized this additional cost imposed on homeowners seeking to take advantage of historically low-interest rates to save money on their mortgages.

Mainly, lenders will honor the rate lock commitments to homeowners in the process of refinancing their homes. Furthermore, borrowers benefit from decreased mortgage costs as a result of record low-interest rates.

Support or disagree with this?

As always, a good place to begin is by contacting your Senators.

More questions?

If you have additional questions about how this might affect your current home refinance or the future refinance opportunities for you, please feel free to connect with me directly and my team and I will be happy to help!