New Loan Fees
Second Home/High Balance Mortgage Costs Rise in new loan fees to be imposed by Fannie Mae (FNMA) and Freddie Mac (FHLMC). Fannie Mae and Freddie Mac represent the largest mortgage owners–the gorillas of mortgage. Known as government sponsored enterprises (GSE’s), they own or guarantee most US mortgages–in excess of $5 trillion.
Both FNMA and FHLMC went broke in 2008. The US Treasury bailed them out with your money and it still owns and controls them through another entity, FHFA. The Federal Housing Finance Agency (FHFA) sets policies and directives for FNMA and FHLMC. Under orders from the new head of FHFA, FNMA and FHLMC announced new loan fees (aka Loan Level Pricing Adjustments or LLPAs). These affect second home and “high balance” mortgages (HERE and HERE). The new costs are effective for loans securitized on/after April 1. That means they actually go into effect earlier for loans since it takes time to securitize after loans get made. Borrowers will see them added within weeks (even for loans closing well before April 1!).
FHFA acted to start limiting investor loans/second homes in early 2021 under orders from the then head of FHFA. However, that person held the position after being appointed by the previous administration in Washington. Seeking to undo everything from the prior administration, whether or not it worked, a new head of FHFA took over and ended the prior limits. Now, the new head is implementing similar restrictions in a slightly different way to avoid admitting error after removing the prior changes solely for political purposes.
Second Homes, Investor Loans, Vacation Homes
The largest impact affects loans for second/vacation homes. Just how much will the changes cost buyers? The loans will cost more through increased LLPA’s. Previously, there were no separate 2nd home pricing adjustments. The new announcement means these loans will soon carry a hefty 1.125 to 4.125% pricing adjustment in new loan fees!
The irony here is that Fannie/Freddie instituted caps on investment property/2nd home loans last spring as we noted. The caps limited these loans to 7% of the total loans purchased by FNMA and FHLMC. Those caps drove rates on rental/2nd home loans up dramatically for several months. They were removed in September, after lobbying by realtors and lenders. The new announcement put 2nd home mortgages generally in the same pricing range as investment property loans.
LLPA were implemented to account for loans’ varying default risk. The default risk factors include credit scores, down payment percentage, loan purpose, and property type. Pick up a copy of Winning Mortgage, Winning Home to learn more about minimizing or avoiding LLPAs.
High Balance Loans
While not as dramatic of change, Fannie and Freddie also raised LLPAs on “High Balance” mortgages. Those mortgages exceed the conforming limit of $647,200 for a single-family residence. High balance loans are available in designated high-cost metro areas. Fees on high balance loans are increasing by .25% to .75% in most cases, with cash out refinances rising an additional .75%. The GSEs made a point of noting that the higher fees would not apply to borrowers with incomes under their area’s median incomes. But borrowers in that income range typically don’t obtain high balance loans.
The bottom line? A high balance loan borrower might/might not notice slightly higher closing costs. 2nd home buyers will almost certainly notice them. Want to avoid the new costs? The time to act is now, the increases will be impacting loan pricing in weeks, not just starting April 1.
Hat tip-Mortgage News Daily