With mortgage rates at unprecedented lows, why are more people not taking advantage of them to refinance or buy houses?
The answers are complex and include sagging consumer confidence in the economy and high unemployment rates. But some mortgage lenders point to what they see as overreactions within their own industry that are discouraging and disqualifying potential borrowers — sharply increased credit score requirements, higher down payments and add-on fees imposed by mortgage giants Fannie Mae and Freddie Mac, who control about two-thirds of marketplace loan volume.
The most controversial Fannie-Freddie fees, which were introduced as the housing bubble began deflating, are known in the industry as “loan-level pricing adjustments.” Many mortgage executives think they are excessive, given the stricter underwriting standards now in place that reduce the long-term risk of new loans being originated today.
Bruce Calabrese, president of Equitable Mortgage, a mortgage banking firm in Columbus, Ohio, considers them “simple cash grabs by Fannie and Freddie because they can, not because of any increased risk.” Fred Kreger, branch manager of American Family Funding in Stevenson Ranch, Calif., says the fees — which can add thousands of dollars in upfront costs to borrowers or raise their interest rates — seem to be out of line with the actual risk in the marketplace, as evidenced by the fact that “portfolio lenders like small- to medium-sized credit unions or banks do not charge them,” even though they are lending to the same customers as Fannie and Freddie.
Lewis Corcoran, a loan officer with Star Mortgage in West Bridgewater, Mass., said the add-ons are killing refinancing deals for customers who want to lock into 30-year rates in the mid-4 percent range.
“You’ve got people out there … who’d like to refinance,” he said in an interview. “But when they look at the points they’ve got to pay because their credit score is a little below” a cut-off line set by Fannie and Freddie, “they decide it’s not worth it.”
Both Fannie and Freddie, which have operated under federal conservatorship since September 2008, maintain sliding scales of fees, starting with a standard one-quarter percent “adverse market delivery charge.” For a $300,000 loan, that’s $750 just to get in the door. On top of that come fees calibrated to a sliding scale of down payment amounts, credit scores and housing types.
Say, for example, you want to buy or refinance a condominium. Under Fannie’s latest add-on matrix, a condo unit buyer who has less than a 25 percent down payment gets hit with a three-quarters of 1 percent add-on fee for starters. On a $300,000 condo loan, this comes to $2,250, which must either be paid in cash or rolled into a higher mortgage rate.
The same matrix imposes additional fees based on applicants’ credit scores. For instance, anyone with a FICO credit score of 679 who is buying a house with between 20 percent to 25 percent down — substantial money for most budgets — is assessed a 2.5 percent “loan-level price adjustment” fee.
Asked for comment on what justifies the continuing imposition of costly add-ons that date back to lower-quality underwriting conditions, officials of the two companies either did not comment or said the fees are needed to cover loss potentials in the future. Brad German, a spokesperson for Freddie Mac, said: “We feel we are pricing risk appropriately.” Fannie had no comment.
Private mortgage insurance companies, who provide coverage against loss to Fannie and Freddie on loans with down payments below 20 percent, are especially critical of the continuing add-on fees. They say the extra charges on top of their own insurance premiums routinely discourage borrowers from taking out conventional loans and push them instead to the Federal Housing Administration, whose market share has exploded from under 3 percent to more than 30 percent in recent years.
Even with the FHA’s move to raise its monthly insurance premiums to borrowers effective Oct. 4, private insurers say that in many cases Fannie’s and Freddie’s add-on fees still make them non-competitive. Without the extra charges, they argue, consumers seeking low down payment conventional loans could be getting lower rates and fees — now — but there’s no sign they will.
Bottom line for borrowers: Absent a sudden change in policy, don’t look for the Fannie-Freddie fees to be cut or eliminated. Both corporations have bigger fish to fry. Beginning early in 2011, Congress is planning a major debate on their existence, their structures and how they relate to consumers who simply want to get the best-priced mortgage they can.
Ken Harney is a real estate columnist with the Washington Post.