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. The directive was scheduled to go in to 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, this directive has been delayed until December 1, 2020. Additionally, the directive was modified and will exempt refinance loans with loan balances below $125,000.
Adverse Market Fee Frequently Asked Questions
Here are some frequently asked questions regarding this directive:
What is a government sponsored enterprise?
The government sponsored entities are financial services corporations created by the United States Congress. 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 GSE’s require a bill or approval by Congress in order to implement these types of decisions?
This is an interesting question. First, let’s review a little history. Fannie Mae and Freddie Mac were are chartered to the liquidity in the mortgage market. In 2008 due to financial turmoil, the Federal Housing Finance Agency (FHFA) took the GSE’s in to conservatorship to help bring stability. 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 government, tax payers and home owners. In this context, the GSE’s have the ability to make this decision without approval of Congress. For a detailed understanding these entities, read the Congressional Research Service report about Fannie Mae and Freddie Mac in Conservatorship.
Why did the GSE’s 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 affect me and 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?
Amid a shaky economy and job security, this additional cost imposed on home owners seeking to take advantage of historically low interest rates to save money on their mortgages has been criticized for a number of reasons. Mainly, existing home owners in the process of refinancing their homes will be able to have their rate locks commitments by lenders honored and get their loans closed and be able to benefit from decreased mortgage costs as a result of record low-interest rates.
What can I do if I support or disagree with this implementation?
As always, a good place to begin is by contacting your Senators.
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!