Re-Pricing of Risk…Again
Often when a lender feels like they’re taking on more risk than they Fannie Mae and Freddie Mac are going to be adding ‘adverse market fees’ to thier mortgages. This isn’t the first time we’ve seen this happen. Back in March of this year, Fannie Mae added a .25% ‘adverse market fee’ to all mortgages. Ultimately this ‘fee’ was built into the interest rate. Often resulting in a .125% higher interest rate for a client.
The new announcement by Fannie Mae this week announces that the adverse market fee will be increasing from .25% to .50%.
When Does It Kick In?
According to Fannie Mae’s announcement, November 1st 2008 will be when they require that fee for delivery. What that means is most likely you’ll see this kick in starting 30-45 days before that (because of the term of the lock)
What Are Mortgage Rates Based On?
It’s been talked about before, but It doesn’t hurt to mention it again. Let’s address the chain (assuming 1 being the first in the food chian).
- Wall Street – They convert investors money into mortgage backed securities.
- GSE’s (Fannie and Freddie)
- Borrowers
Mortgage money ultimately comes from Wall Street. From Wall Street it sells to GSE’s (Government Sponsored Enterprises) such as Fannie Mae and Freddie Mac. From here Fannie and Freddie build in their margin for profit. That margin is now being increased to compensate for the rising risk on mortgages. Ultimately the cost gets passed on to the borrower (YOU) and a higher interest rate is paid.
Forget What You Thought Before
Before, mortgage rates were simply based on mortgage backed securities. Now, we’ve see additional fees added to mortgage rates. Not only is there a new adverse market fee, but there are also loan level price adjustments (LLPA’s) that are based on credit score. I’ll be covering that on another blog post.
Get Off The Fence If You’re On It
I’ve been saying this for months now. Mortgage bacekd securities may be holding steady (relatively), but mortgage rates can still increase with these new fees. It’s going to continue to get worse before it gets better. If you’re waiting to hit the ‘bottom’ for home prices, you need to take into consideration the increasing borrowing cost.
We’re here to help you sort through the options. If you have any questions, don’t hesitate to ask!
