The federal housing finance agency (FHFA), the largest buyer of mortgages through Fannie Mae and Freddie Mac (Fannie/Freddie), announced huge changes to there fee structure. In particular they are targeting high cost loans with big jumps for second homeowners. Who will pay these new fees? How much will they cost the average homebuyer? How will these fees impact real estate prices and purchases?
What was in the new announcement?
The Federal Housing Finance Agency (FHFA) announced targeted increases to Fannie/Freddie (the Enterprises) upfront fees for certain high balance loans and second home loans. High balance loans are mortgages originated in certain designated areas above the baseline conforming loan limit. The new fees will go into effect for deliveries and acquisitions beginning April 1, 2022, in order to minimize market and pipeline disruption.
In April, upfront fees for high balance loans will increase between 0.25 percent and 0.75 percent, tiered by loan-to-value ratio. Fannie/Freddie refer to these mortgages as high balance loans and super conforming loans, respectively. For second home loans, upfront fees will increase between 1.125 percent and 3.875 percent, tiered by loan-to-value ratio.
Here is the full release from the FHFA
Why is the government implanting these changes?
“These targeted pricing changes will allow the Enterprises to better achieve their mission of facilitating equitable and sustainable access to homeownership, while improving their regulatory capital position over time,” said Acting Director Sandra L. Thompson. “Today’s action represents another step FHFA is taking to strengthen the Enterprises’ safety and soundness and to ensure access to credit for first-time home buyers and low- and moderate-income borrowers.”
Two big changes to buyers from the announcement:
- High cost loans: A high-balance loan is one that exceeds the national baseline conforming loan limits, but falls within the local conforming loan limits for your high-cost county. High-balance loans are considered conforming loans with respect to Fannie/Freddie (Freddie Mac refers to them as “super-conforming loans”). For example, assume you were buying a home in Boulder for 840k which is conforming, but above the national conforming average of 647k, upfront fees for high balance loans will increase between 0.25 percent and 0.75 percent.
- Second home owners: This is where the biggest changes are. For second home loans, upfront fees will increase between 1.125 percent and 3.875 percent, tiered by loan-to-value ratio.
How much will these changes cost real estate buyers?
- High cost loans, assuming the same scenario above with an 840,000 purchase price, this would cost the new borrower 6,300 (assuming .75% increase), in some high cost areas the conforming loan amount is 950k, this would lead toa fee of 7,125 for these buyers
- Second homeowners: Assume a 500k second home purchase, with a fee of 3.875%, the fee would be almost $20K!
Why is the FHFA making these changes?
“These targeted pricing changes will allow the Enterprises to better achieve their mission of facilitating equitable and sustainable access to homeownership, while improving their regulatory capital position over time,” said Acting Director Sandra L. Thompson. “Today’s action represents another step FHFA is taking to strengthen the Enterprises’ safety and soundness and to ensure access to credit for first-time home buyers and low- and moderate-income borrowers.”
Government will no longer fund second home loans
Although the fhfa is not stating that they will not make second mortgage loans, the changes will substantially increase the costs for borrowers which will by default make these loans less effective than other options. This change basically eliminates second homes being funded by Fannie/Freddie and they will likely be treated similar to jumbo loans with.
How will these changes impact real estate prices and closed volume?
- High cost homes: it will be more expensive for high cost loans, but I don’t think the impact will be material. An additional 6300 if someone is buying an 840k home is typically not a deal killer. Volumes and prices will have little impact
- Second homes: There could be much larger impacts in the 2nd home market as almost 20k fee on a 500k home is a big number. You will see the market transition to loans similar to jumbo with higher qualifications, rates, and fees. The changes by the FHFA should substantially slow the volume of closings on second homes.
Summary:
Essentially FHFA has figured out that they were getting a little further away from their mission by funding high-cost loans and such a large volume of second homes. The pendulum has swung back the other way with the new changes that bring big fees especially for second home owners.
FHFA through their actions will basically end the process of Fannie/Freddie buying second home mortgages as they price themselves out of the market. Second homeowners should brace for stricter underwriting, higher fees, and higher rates. Furthermore high cost loans will also see an increase in fees.
Additional Reading/Resources:
- Understanding a High-Balance vs. Jumbo Loan | LendingTree
- FHFA hikes fees for high-balance and second-home loans – HousingWire
- FHFA Announces Targeted Increases to Enterprise Pricing Framework | Federal Housing Finance Agency
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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