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Freddie, Fannie fight back

The GSEs have come out swinging after widespread denunciation of the LLPA

Fannie Mae and Freddie Mac have offered a robust defence of their August 12 announcement to impose a 50bp loan level price adjustment (LLPA) on mortgage refinancing from September 1, which has elicited a firestorm of criticism from wide sections of the industry and government.

The GSEs yesterday issued a lengthy joint statement which stressed that the decision to pass on the 50bp fee resides with the lenders, some of whom may choose to absorb the fee “given market conditions”. Even if the fee is passed onto borrowers refinancing their mortgage, the extra cost will be minimal and also more than offset by record low rates, the statement says.

Issued in the names of Freddie CEO David Brickman and Fannie CEO Hugh Frater, the statement roundly refutes the misapprehension that this action will cause mortgages to “go up.”

The statement offers a laundry list of some of the the actions taken by the GSEs since the beginning of the Covid crisis to protect borrowers and ensure the liquidity of the mortgage market, but while the GSEs are “proud of this effort” it has not been costless and delinquencies will continue. “This modest fee will help us continue helping those who are really hurting during the pandemic,” the statement says.

Yesterday a cabal of Democratic senators joined the chorus of disapproval and wrote to Federal Housing Finance Authority (FHFA) director Mark Calabria to raise their concern about the so-called adverse market refinance fee. “This sudden additional charge will affect loans currently in the refinance process and could cause both confusion and increased costs for homeowners,” they said.

Senate banking committee chairman Mike Crapo (R-Idaho) last week also complained about the move and requested a letter from Calabria explaining why the FHFA had deemed the move necessary.

The Trump administration has not been silent either. “The White House has serious concerns with this action, and is reviewing it,” it told the Wall Street Journal last week.

These comments are significantly milder than the torrent of vilification that has poured forth from other sections of the industry. A flavour of the above might be discerned from the statement issued by the California Mortgage Bankers’ Association (MBA) two days ago: “The announced imposition of a new 0.5% fee on all GSE refinance transactions is an unwarranted, opportunistic, ill-timed, and potentially devastating blow to one of the few economic sectors that has helped support the U.S. economy during the unprecedented health and fiscal crisis we currently face”.

Twenty four hours after the announcement of the LLPA, 27 trade organizations, led by the national MBA, issued a joint statement which termed the new fee an “illtimed, misguided directive” which also “undermines and contradicts” Fed policy.

Sources close to the GSEs suggest the agencies are hopping mad at this tsunami of hostility, which they see as exaggerated and unfair. They believe, for example, that the LLPA will reduce savings in an average mortgage by just $15 a month - much less than some estimates that have been floating around.

As they allude to in yesterday’s statement, the GSEs feel that they are attracting unjustified criticism for imposing a refinancing charge, as it is the decision of the lenders to pass this on to borrowers not that of the agencies.

They also believe that the fee is necessary to ensure continued stability at a time of considerable economic uncertainty. This belief, of course, has underlined the many questions that surround the current capital resources of the GSEs as the FHFA readies both agencies to exit conservatorship. It seems that neither are well-insulated enough against the storms that may lie ahead, or the fee would not be necessary.

The GSEs’ belief that some lenders might choose not to pass on the fee is supported by some independent analysis. “Lenders might be willing to keep the fee if they want the volume,” says Moody’s senior analyst Lima Ekram.

She also believes that the fee will improve RMBS quality as it acts as a disincentive for borrowers to take on more debt through cash-out refinancing - or re-mortgaging. “It’s a credit positive for cash-out refinancing loans because these loans are more risky than other loans as borrowers are extracting equity and taking on more debt,” Ekram explains.

Other sources suggest that the refi fee has ruffled so many feathers because it was unexpected and also because it starts almost immediately. “This thing starts two weeks after the announcement. Normally you get a heads up of a quarter or two quarters, but not this time,” says one MBS investor

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