Mortgage Refinancing Is About to Get More Expensive

August 19, 2020 Updated: September 2, 2020

Commentary

The cost of refinancing a mortgage is about to go up. Those considering refinancing their home mortgages might want to rush to complete the process before Sept. 1.

Starting then, Fannie Mae and Freddie Mac—the two entities that facilitate the overwhelming number of mortgages in the United States—will charge an 0.5 percent “adverse market fee” on all home refinances, in light of the coronavirus pandemic.

For example, if a borrower seeks $350,000 to pay down a current mortgage and maybe use any money left over for other purposes, it will cost an additional $1,750 in fees.

During the financial meltdown that led to the Great Recession, those two entities, officially the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corp. (FHLMC), both had to be bailed out by the federal government amid the subprime mortgage crisis.

The entities, formerly known as “government-sponsored entities,” had an implied guarantee. As a result of the bailouts, they have both been in conservatorship for about 11 years, which means there is a “conservator” overseeing their operations and finances, hopefully, to keep the entities out of trouble.

While a financial institution will lend, on average, about $350,000 to a typical borrower, that lender can quickly run out of capital to make new loans. New loans generate origination fees and other fees, so the original lender will often sell that mortgage to Freddie Mac or Fannie Mae.
Now, the borrower owes whichever entity bought their mortgage.

These days, FHLMC and FNMA will buy billions of dollars in mortgage loans and put them all into a “pool” (a special legal entity, or special purpose vehicle) that then borrows money so that FHLMC and FNMA can get paid back for most of its investment, then buy more mortgages, create another pool, and continue the process.

This is one of the key ways these entities support the housing market all across the United States.

One of the few ways “average” consumers and investors can act to better their economic lives during the pandemic is to take advantage of the record-low U.S. interest rates and borrow money to buy a home (if there’s already money saved for the down payment).

Additionally, people who already own a home can refinance their current mortgages—interest rates currently run in ultra-low territory, at about 3 percent.

No one can say what interest rates will do in the future, because like all financial markets, interest rates are determined by current events and expectations for the future. However, looking at just the interest rate that investors now expect from holding a 10-year bond issued by the U.S. Treasury: rates have slipped to about 0.6 percent from about 2.5 percent before the pandemic.

Many people have already been refinancing their homes. Indeed, the Mortgage Bankers Association says that refi activity is up 38 percent from a year ago.

Tim Shaler is a professional investor and economist based in Southern California. He is a regular columnist for The Epoch Times, where he exclusively provides some of his original economic analysis.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.