Inequity and disparate treatment are making headlines this week, but this time it is the Federal Housing Finance Agency (FHFA) that's being called into question.
Mortgage lenders and consumer groups are in an uproar over the FHFA’s decision to have Fannie Mae and Freddie Mac charge borrowers a 0.5 percent “adverse market fee” on mortgage refinances. Even though Fannie and Freddie charge this fee to mortgage lenders, many lenders are going to pass it onto consumers. The Mortgage Bankers Association estimates this fee will cost the average homeowner $1,400.
The fee, which goes into effect September 1, is also onerous to mortgage brokers who have already locked in rates with consumers since the fee applies retroactively. That’s forcing many mortgage lenders operating on slim margins to eat the fee on mortgages.
Fannie says the reason for the fee is “market and economic uncertainty resulting in higher risk and costs.”
Equity is always an issue when talking about Fair Lending, and this new fee raises serious questions about equity, particularly when it comes to middle-class households versus the more affluent.
This new fee only applies to conforming loans purchased by Fannie and Freddie. The GSEs don’t buy jumbo loans, those that exceed $510,400 in most areas and $765,600 in high-cost areas.
That means well-off families using jumbo loans to refinance more expensive homes won’t have to pay the fee while working- and middle-class Americans that rely on conforming loans will. For these households, the fee may make the difference between making refinancing worthwhile and putting it out of reach under TRID’s Ability-to-Repay rules requiring that borrowers achieve a minimum level of savings when refinancing.
These households are also more likely to be struggling during the pandemic with closed businesses and less opportunity to work from home. This is especially true in minority communities where unemployment rates are higher. As a result, this move by Fannie and Freddie may end up excluding minority households from a historic opportunity to refinance at the lowest mortgage rates we’ve ever seen.
Lenders have a lot to consider when deciding what to do when implementing this new fee. Questions to consider include:
Will we pass this fee onto borrowers? FIs must decide whether they are going to pass on the fee to those already in process but not yet locked. Additionally, the handling of this fee for future applications is critical. Lenders need to consider if the fee will be passed on to the borrower, waived, or paid by lender credit. Whatever the policy change, the fee needs to be handled consistently for similarly situated borrowers. For example, you might decide to eat the fee for refinances of less than $50,000. If that is the case, it needs to be in the policy.
It’s also important to do a risk assessment. This will enable you to determine potential pitfalls this fee may pose to your operations. It is important to consider things like:
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There’s also the issue of fee waiver exceptions.
What about borrowers who were quoted a rate and complain when they encounter a new fee? What will your institution do if a customer discovers the new fee and complains? Will you point out that everyone is charging it and there is nothing you can do about it or will you waive the fee and pay it yourself for borrowers who have already started the process and been given quotes, but aren’t locked?
This can be tricky because not every borrower will notice the new fee. As a result, savvier borrowers would be more likely to avoid the fee than less astute ones. There may also be a temptation to waive the fee for “good” customers.
The key is to create an exception policy to address the new fee. You want to consider:
These scenarios related to the GSEs new adverse market fee all have the potential to cause disparities in pricing data. You will need to have a strong process in place to track, trend, and account for these potential differences. It will be ideal to create an exception process for waiving the fee.
Make sure you analyze the impact of these policy decisions. You don’t want to discover that LMI communities are paying more fees than other communities.
Will, the adverse market fee be repealed under pressure from financial institutions and community groups or will it stick around? We can’t predict that, but we do know it will be important to handle the fee consistently. Make sure you plan your response and codify it in policies and procedures.