As if borrowing money to buy a house hasn’t gotten tight enough, Fannie Mae and Freddie Mac are now spreading their lending risks to home buyers with excellent credit scores who will now pay one-time mortgage fees that previously have been shouldered mostly by riskier borrowers.
For the first time in three years, the two government entities have raised their risk fees. Freddie’s go into effect on March 1 and Fannie’s on April 1, but lenders reportedly are already tacking on the fees to cover loans that Fannie and Freddie—which account for about two thirds of new mortgage originations—will eventually purchase for resale to investors.
What’s different about the new fees is how they are being applied to the broadest spectrum of borrowers. Fannie’s “loan-level price adjustments,” its euphemism for the fees, “have been changed for most mortgage loans with LTV [loan-to-value] at or above 70%,” wrote John Fortlines, Fannie’s vice president and single-family chief risk officer, when the agency announced the fees last December 23.
Right off the top, Fannie and Freddie are including in every mortgage an “adverse market delivery charge” of 0.25%. So if the house being purchased is valued at $400,000, that’s an extra $1,000 the borrower now has to fork over.
With a few exceptions, borrowers with FICO scores of 720 or better previously were excluded from risk fees. Now, under Fannie’s new math, borrowers with excellent credit will have to put down at least 25% of the value of the house being purchased to avoid the fees.
So, for example, if your FICO score is, say, 730 and you’re putting down 20%, you will now pay a risk fee of 0.5%, versus the previous fee of 0.25%. Whereas the risk fee for borrowers with FICO scores between 700 and 719 used to be 0.5% across the board, regardless of the size of their down payment, now it ranges from 0.5% to 1%, depending on how much the borrower antes upfront.
The fees can be considerably higher for borrowers with lower FICO scores. Fannie is charging anywhere from 0.5% to a whopping 3.25% to borrowers with FICO scores in the 640 to 659 range, depending on their down payment. Previously, fees for those borrowers, with one exception, were 2.75% or less.
So a person with a 650 FICO score who was putting less than 20% down on a $300,000 house will now pay a risk fee of $9,750, compared to $8,250 under Fannie’s previous fee schedule.
Fannie and Freddie have also updated their risk fees for specific dwellings and mortgage instruments. If you’re purchasing a condominium and putting down less than 25%, your fee is going to be 0.75%, which is generally higher than a similar loan for a single-family home with the same down payment. Borrowers purchasing investment properties will now pay anywhere from 1.5% to 3.75%, although the fee, strangely, isn’t applied to loans for investment properties with LTVs 15% or lower except when those mortgages are refis or modified, at which point the fee is a straight 1.75, regardless of the down payment.
Borrowers taking a mortgage on a manufactured or modular home will pay a 0.5% risk fee.
Lenders have the option of charging borrowers upfront for these fees or incorporating them into the mortgage payments. Freddie has estimated that its “post-settlement delivery fee” of 0.25% on a $200,000 30-year loan works out to about $10 per month.
So far, NAHB has not responded publicly to Fannie's and Freddie's new risk fees, although the association objected to higher fee structures that Fannie and Freddie imposed in 2009. Builder was unable to reach the National Association of Realtors or the Mortgage Bankers Association for comment by presstime.
John Caulfield is senior editor for Builder magazine.