The add-on fees charged on home loans by Fannie Mae and Freddie Mac, the two government-backed mortgage giants, are hampering new home buyers and doubling expenses for consumers, critics claim.
According to a new report by Kenneth Harney, a columnist with The Washington Post Writers Group, Fannie and Freddie are still charging consumers and other mortgage lenders "punitive, recession-era" fees despite the profitability they have recently reached.
The Fees
Fannie and Freddie use systems like Loan-Level Price Adjustments (LLPA) and Adverse Market Delivery Charges (AMDC) to impose fees on risky borrowers. The risk is calculated using their down payment and credit rating. These fees are usually charged on the base interest paid by the borrower.
The two mortgage bigwigs also charge other lenders a substantial amount to guarantee the mortgage bonds. These fees could drive costs on a 5 percent down payment rate up to 7 percent.
The fee system started after the 2008 housing market crash. After several private lenders sold faulty mortgages to Fannie and Freddie, the two giants sunk under the weight of the debt and were rescued by the U.S. government in the form of about $170 billion in aid. The two firms have been profitable since the housing market recovery. According to Value Walk, the government expects to rake in a profit of more than $179 million from Fannie and Freddie over the next 10 years if the ownership remains unchanged.
Fees are "Arbitrary"
Given such profitability, critics claim these additional fees are now "arbitrary," noting that the two giants are already insured against most of the losses by several private insurance policies.
Mike Zimmerman, senior vice president of MGIC, told Harney that eradicating these unnecessary fees could help consumers save substantially.
Fees Affecting Home Buying
The fees are affecting home buying, especially among first-time buyers and those purchasing property under $417,000. Indeed, the pending home sales index of the National Association of Realtors fell 10.5 percent in February on tight inventory and rising interest rates, according to Global Property Guide.
Mel Watt, the director of the Federal Housing Finance Agency (FHFA), the organization that controls the two mortgage giants, has been notably tight-lipped, however.
Fannie and Freddie Overhaul
Meanwhile, the fate of Fannie Mae and Freddie Mac's existence is still being decided on. While proposals to wind down the two giants are being discussed in the senate, a recent study analyzed the effect of their overhaul, claiming that it would only result in higher mortgage rates.
"Mortgage rates are likely to rise under any plan to overhaul Fannie and Freddie because most proposals call for the firms or any successors to hold more capital than the mortgage-finance giants did. There's little dispute that Fannie and Freddie failed because they held too little capital for the risks they were taking," Nick Timiraos wrote for The Wall Street Journal.
