Breakage Provisions Changes Effective March 6
February 9, 2012
By now, you should be familiar with the breakage fee provisions we implemented in December in support of the efficiency changes in our early rate-lock process. We are using this same formula for calculating the breakage fee of an Early Rate-Lock Application for nondelivery under our standard delivery option.
Currently, we charge Sellers a fee of two percent of the maximum loan amount for a nondelivery under our standard delivery option. Instead, for Commitments issued on or after March 6, 2012, we will be charging the Seller a breakage fee for Conventional Cash and Targeted Affordable Housing (TAH) Cash Mortgages using the standard delivery option in the event of a nondelivery. The adjustment factor for the standard delivery breakage fee will be 0.4167 bps.
Replacing the Two Percent Nondelivery Fee
While a nondelivery under our standard delivery option is rare, we continue to see significant interest rate volatility over short periods of time. The two percent late delivery charge for a nondelivery under our standard delivery may not always cover the overall breakage costs. The early rate-lock delivery breakage formula covers these costs in the event of nondelivery.
Although we will use the same formula as we do for breakage in an early rate-lock, the process for breakage for a standard delivery will differ from that of the early rate-lock process in the following ways:
- Unlike the early rate-lock breakage provisions, for a standard delivery option we will not require you to include the specific breakage provisions in your application with the borrower.
- We will not require that you collect a two percent good faith deposit nor will we require the delivery of any deposit to us.
- In the event of a nondelivery under our standard delivery option, since we will not be holding a good faith deposit, we will collect the breakage from the Seller and will not pursue the borrower directly.
With the elimination of the of the two percent nondelivery fee, we will collect the breakage from you. We recommend the following best practices:
- Include the breakage provision or some similar provision in your application with the borrower. This practice will allow you to collect the same breakage fee from the borrower.
- If you are not already doing so, begin collecting a two percent deposit from your borrower for all standard delivery loans.
Implementing the Breakage Provision Changes
The Guide Bulletin scheduled for February 29, 2012, will incorporate these breakage provision changes. Beginning with any Commitment Letters issued March 6, 2012 or after, the breakage provision will be included in the Letter of Commitment.
You will find the breakage fee formula and adjustment factor chart applicable to both standard deliveries and Early Rate-Lock Applications available for review. Please contact your Freddie Mac regional representative or Susan Senter with any breakage fee questions.