If you’re a prospective homebuyer/homeowner seeking mortgage financing using ‘conventional loans’, you could end up paying more come April 2014.
‘Conventional loans’ = Fannie Mae and Freddie Mac, aka Government-sponsored enterprise (GSE) loans.
Earlier this month, the Federal Housing Finance Agency ordered Fannie Mae and Freddie Mac to increase charges called “guarantee fees,” or g-fees, that are embedded in the cost of home loans to protect investors from losses. Theoretically, raising these fees would bring private capital back into the mortgage market and better reflect a borrower’s credit risk.
For loan officers, this will likely make it more difficult to determine whether a borrower is a better candidate for a GSE loan or a loan through the Federal Housing Administration (FHA). But for borrowers, the potential impact is much more significant: adding thousands of dollars to closing costs.
Starting March 2014, the Loan-Level Price Adjustment fees, or LLPA fees, of GSE loans may be raised for borrowers with credit scores above 660 and a down payment of less than 30%. Borrowers with scores between 680 and 760 who are making a 5% to 10% down payment could see an interest rate that is 3/8 of a percent higher.
How many “thousands” are we talking?
So, let’s crunch some numbers. An example prepared by HSH.com shows the effect on a borrower with a credit score of 740 who puts down 20%. Under current programs, the borrower would be charged $250 in LLPA fees and $250 in Adverse Market Delivery Charges (AMDC) for every $100,000 borrowed.
With the proposed changes, the AMDC fee will disappear in lieu of a 1.5% LLPA fee. That will total $1,500 per $100,000, potentially raising the closing costs on a $300,000 loan by $4,500.
*Local Note: Since average home loans are about $150,000 in the Mahoning Valley area, you’d probably be looking at about $2,250 in additional closing costs.
Of course, borrowers with lower credit scores will be higher costs than those with better credit scores. But, if a borrower has a credit score of 740, which is good, why the increase in closing costs?
Because the size of the down payment is the biggest factor. Having a lower ratio between the loan amount and the home’s value reduces the lender’s risk of loss in the event of a foreclosure. So, even as a borrower with a 740 score, there is greater potential that you will pay more to buy a house with these proposed changes.
Don’t freak out just yet!
Naturally, I would advise any homebuyer to “get moving” if they’re sitting on the fence…and anyone looking to refinance to do so before these increases take effect. But late last week, Congressman Mel Watt, D-N.C., said he planned to delay the GSE Loan fee increase until he had an opportunity to fully review the reasoning behind the increase. Watt will be sworn in as the new GSE regulator on Jan. 6.
“I intend to announce that the FHFA will delay implementation (of the loan-fee increases) until such time as I have had the opportunity to evaluate fully the rationale for the plan,” Watt stated. “I felt it was important to announce my intention now because of the prospect that some lenders could start to price the changes…well before the effective dates.”
So, at this point it looks like things are up in the air, but that doesn’t necessarily mean these changes are going to be squashed. My team will keep an eye on this topic in the coming months and, if Watt does decide to implement these changes, it might be time to start crunching mortgage numbers and/or house hunting in the winter.