Perspectives
August 19, 2020

Providing Unprecedented Liquidity and Stability to the Mortgage Market Throughout the Crisis

David Brickman and Hugh R. Frater
By
David Brickman, CEO, Freddie Mac
Hugh R. Frater, CEO, Fannie Mae

Over the last week, there has been significant discussion about the two companies where we serve as CEOs, Fannie Mae and Freddie Mac, and the independent regulator and conservator that oversees us, the Federal Housing Finance Agency. The issues raised are too important for us not to address.

On August 12, we each announced that we will soon implement a pricing adjustment to be paid by mortgage lenders for refinance mortgages acquired by our companies. Fannie Mae and Freddie Mac help provide lenders with the cash necessary to keep lending by purchasing their mortgages and packaging them into mortgage-backed securities that are sold to investors. Our companies then guarantee the principal and interest payments made by borrowers to investors on their behalf. In exchange, we charge lenders a guarantee fee. Starting December 1, for refinance mortgages, lenders will pay an extra 0.5 percent of the loan amount as a one-time charge; it is not a 0.5 percent increase on the annual mortgage interest rate. 

Contrary to much of the criticism we have received since making this announcement, this will generally not cause mortgage payments to “go up.” The fee applies only to refinancing borrowers, who almost always use a refinancing to lower their monthly rate. 

Homeowners generally refinance when the interest rate available today is lower than the rate they signed up for when they got their loan. The difference must be big enough that, even after paying the lender’s transaction fees, borrowers save money on their interest payments by getting a new mortgage at the new, lower rate.

Some have asserted that this price adjustment could impact borrowers by as much as $1,400—but this life of the loan estimate is a misrepresentation of how this cost would be applied. For an average refinanced mortgage, we estimate a reduction in savings of about $15 per month, meaning refinancing homeowners who were previously saving $133 on their monthly payments will now save $118 per month, on average.

For borrowers in this scenario, this estimate also assumes lenders pass on the entire fee. That is up to the lenders. If they do not, the $15-per-month figure would go down, potentially to zero.

Record low mortgage rates this year have spurred a refinance surge and record high profit margins for some mortgage lenders. We believe that given current market conditions, some lenders may choose to absorb the new fee and keep rates unchanged. Still others may just pass on a portion of the costs. But even if lenders do choose to pass all those costs on to their customers, refinancing homeowners will still be able to save money by taking advantage of historic low interest rates. Moreover, this entire cost may easily be offset by the continued declines in mortgage rates we are generally experiencing.

To ensure we do not impact homebuyers in any way, purchase loans were not included in this action. Existing mortgages will not be affected by this price adjustment either.

The companies requested approval from FHFA to collect this increase from lenders, as we are required to do. Separately, we each regularly discuss with FHFA our views on risk, pricing, and capital considerations. The approach we announced last week was the product of that process, and focuses particularly on helping to fund our ongoing efforts to support homeowners and renters impacted by COVID-19. The fact is we have put in place many policies for mortgages backed by our companies that have provided critical support to homeowners and renters during COVID-19. Fannie Mae and Freddie Mac are willingly absorbing the cost of these activities.

Our efforts to help affected homeowners and renters began even before the March 16 national emergency declaration. By any measure, it has been an historically effective policy response to help keep Americans safe in their homes during this pandemic.

Through our forbearance programs, we are enabling borrowers to pause or reduce their mortgage payments for up to 12 months. We worked with servicers to develop loan modification options and repayment plans, so borrowers don’t face payment shock and can remain safely in their homes. And we are allowing borrowers who return to making monthly payments to repay what they missed when they sell their home or refinance their loan, so that repayment does not become an overwhelming burden. To date, these forbearance programs have enabled more than 2 million families to stay in their homes during this health crisis.

We also suspended single-family foreclosure and eviction actions in process before the pandemic, enabling some 200,000 delinquent borrowers to stay in their homes. We halted new foreclosure actions, which we have extended through the end of August. And to protect renters, we created new nationwide forbearance programs for landlords of multifamily properties on the condition that they adopt certain tenant protections, including a moratorium on evictions. Currently, renters in roughly 170,000 multifamily units are protected by these programs.

This is just a fraction of the actions we have taken in coordination with FHFA to support homeowners and renters. We are proud of this effort. But it has not been costless. Nor is it complete. While the re-financing market remains strong, there will be delinquencies and defaults that hit companies because of COVID-19. This modest fee will help us continue helping those who are really hurting during the pandemic.

Throughout this crisis, our companies have provided unprecedented liquidity and stability to the mortgage market. The actions we have taken in the last few days with the support and direction of FHFA will ensure we can continue to maintain that stability over the long-term.