Mortgage add-on fees hit hard

When you’re raking in tens of billions in profit by helping credit-elite borrowers purchase homes, couldn’t you lighten up on fees a little for everyday folks?

That’s a question increasingly being posed to government-controlled home-mortgage giants Fannie Mae and Freddie Mac and their regulators.

Though most buyers are unaware of the practice, Fannie and Freddie — by far the country’s largest sources of mortgage money — continue to charge punitive, recession-era fees that can add thousands to financing costs. This despite enjoying record profits, low delinquency rates and rising home values, plus protecting themselves from most losses with insurance paid for by consumers.

Critics say by making conventional mortgages more expensive, these fees are partially responsible for recent declines in home purchases, especially among moderate-income, first-time and minority buyers. The add-on fees can raise interest rates for some borrowers to more than 5 percent, from the mid-4 percent range. Since Fannie and Freddie operate under federal conservatorship and send their profits to the government, the fees amount to a federal surtax on homebuyers.

Last year, the two had a combined net income of nearly $133 billion and pre-tax income of $64 billion. By contrast, the entire private-mortgage industry — big banks, small banks, mortgage companies, brokers, servicers and others — had $19 billion in pre-tax income, according to the Mortgage Bankers Association.

Fannie and Freddie got into deep financial trouble acquiring and backing poorly underwritten loans during the boom. But under regulatory supervision since 2008, they improved their performances, primarily by severely tightening credit standards. As part of that, they created “loan level pricing adjustments” designed to charge more to borrowers with certain perceived risks. Small down payments, for example, get hit with higher add-on fees than larger ones. Applicants with low credit scores are assessed much higher fees than those with pristine records. Buyers of condominium units who make down payments of less than 25 percent get charged a hefty extra fee no matter what their scores. Fannie and Freddie also charge lenders fees to guarantee mortgage bonds — again ladled onto borrowers’ bills — and those have doubled since 2011.

Critics like Mike Zimmerman, senior vice president of private mortgage insurance company MGIC, calls the companies’ add-ons “arbitrary” and excessive under current market conditions. For some borrowers, he says, the fees can increase monthly costs of a 5 percent down payment loan on a $220,000 house by up to 7 percent. Since Fannie and Freddie are already insured against most losses on low down payment loans by private insurance, he argues, these add-ons are unnecessary.

A spokesperson for the two corporations’ regulator — the Federal Housing Finance Agency — declined to comment on the issue of add-on fees. The agency has a new director, former North Carolina Congressman Mel Watt, who has made virtually no public statements since taking over in January. He is said to be studying options regarding key policy issues.

Mortgage Bankers Association CEO David Stevens says the fees are thwarting home purchases, especially in the under-$417,000 segment dominated by Fannie and Freddie. Stevens said in an interview the fees are out of line with their real risks and are hurting homeownership.

Could this change, and borrowers get a break? It’s up to Watt, and so far, he is mum.

Kenneth Harney is a syndicated columnist.