Taking from those who save to buy political favor

Fannie, Freddie charge borrowers for feds' tax cut

Kathleen Pender

Congress' idea to launder a tax increase through Fannie Mae and Freddie Mac is already costing borrowers.

Just before Christmas break, lawmakers decided to pay for a two-month extension of the payroll tax cut and federal unemployment benefits by raising the guarantee fee that Fannie and Freddie charge on loans they buy by at least 0.1 of a percentage point. The fee normally stays with Fannie and Freddie (now majority-owned by taxpayers) to compensate them for the risk they take on loans they buy and guarantee.

The extra 0.1 of a percentage point, however, will to be sent directly to the U.S. Treasury to pay for the payroll tax cut and unemployment benefits.

A fee of 0.1 of a percentage point will be added to all loans that Fannie and Freddie buy for almost 10 years - from April 1 to Oct. 1, 2021. Because it can take months to close a loan and deliver it to Fannie and Freddie, many lenders have already added the fee into their pricing for new loans. (It will not affect existing loans.)

Wells Fargo began adding the fee Wednesday on loans going to Fannie and Freddie. Chase added it Jan. 3. Bank of America would not disclose whether it has added it yet.

If you have already applied for a new loan and locked in a rate before the increase took effect, you won't be affected unless you cannot close the loan before the rate lock expires.

Wells spokesman Tom Goyda says the fee will add a bit less than one-eighth of a percentage point to a 30-year, fixed-rate loan.

Because mortgage rates are rounded to the nearest eighth, count on it adding one-eighth of a percent.

That doesn't sound like much, but on a $400,000 loan it would add about $228 a year in mortgage payments.

Lower rate, higher fees

Borrowers usually have the option of paying a lower interest rate in exchange for higher up-front fees, often called points. To reduce the rate on a typical 30-year, fixed-rate loan by one-eighth, a borrower would usually pay about 0.4 percent of the loan balance in extra fees today, says mortgage broker Mark Leaver of Loanlane Residential. On a $400,000 loan, that's about $1,600 extra in fees.

To maintain parity on government loans, Congress also raised the annual mortgage insurance premium on Federal Housing Administration loans by 0.1 of a percentage point. The FHA has not said when or how it will implement that increase.

Although these increases do not apply to jumbo loans and loans that are not government guaranteed, they will probably raise the cost of all mortgages, which are typically priced at some premium to Fannie/Freddie loans.

Consumers won't see these fees broken out because they are factored in to the final price of the loan, says Keith Gumbinger, a vice president with HSH Associates.

Most borrowers won't even notice them now because interest rates are so low. Freddie Mac reported that mortgage rates slipped to record lows for the week ending Thursday. The average cost of a 30-year fixed-rate mortgage was 3.89 percent interest with 0.7 of a point, down from 3.91 percent the previous week and 4.71 percent this time last year.

The agency that regulates Fannie and Freddie said it will announce early this year whether it will increase the fee by more than 0.1 of a percentage point to meet the requirements of the new law.

More housing developments

It was a busy week for Fannie and Freddie.

On Tuesday, Fannie Chief Executive Officer Michael Williams said he will step down as soon as a replacement can be found. Williams worked at Fannie since 1991 and became CEO in April 2009.

In October, Freddie's CEO, Charles Haldeman Jr., said he will resign within the next year.

The government seized Fannie and Freddie in October 2008. Since then, their regulator, the Federal Housing Finance Agency, has been calling most of the shots.

Edward DeMarco, the agency's acting head, has been criticized by some for taking his mandate to protect taxpayers from mortgage losses too seriously and not doing enough to help struggling homeowners and the housing industry.

On Tuesday, 28 House Democrats from California urged President Obama to name a permanent director to the agency while Congress is in recess. Obama made other recess appointments, including naming Richard Cordray to head the Consumer Financial Protection Bureau.

"FHFA has consistently and erroneously interpreted its mandate far too narrowly and as such has failed to take adequate action to help homeowners," the lawmakers wrote in a letter to Obama. "Installing a permanent director of the FHFA will allow the FHFA to move forward to make key decisions that will help keep families in their homes and improve our economy."

Underwater assistance

Fannie and Freddie have not exactly ignored struggling homeowners. They recently expanded the Home Affordable Refinance Program to let qualified homeowners who are current on their mortgage and owe more than their homes are worth refinance into a new mortgage no matter how deeply underwater they are.

And Wednesday, Fannie told banks that service its loans they could let unemployed borrowers make no or partial mortgage payments for up to six months without Fannie's approval or up to 12 moths with its approval. Freddie made a similar announcement Jan. 6.

Both the refinance and forbearance program can help only homeowners whose mortgages are backed by Fannie or Freddie. In the Bay Area, that leaves a lot of homeowners out of luck because they took out loans that were too large to be sold to Fannie and Freddie.