Credit unions fear that a fee charged by Fannie Mae and Freddie Mac on refinanced mortgages could put a damper on the otherwise booming business.
Earlier this month, Fannie Mae and Freddie Mac announced that due to the current economic turmoil, they would charge a "negative market fee" of 0.5% on most refinanced mortgages starting September 1. The move was immediately met with widespread setbacks from mortgage lenders and consumer groups, and the government-sponsored companies later postponed the implementation date by three months.
Despite the delay, credit unions fear members may choose not to refinance their mortgage as the fee will likely add to the cost. This could hurt the industry's profitability and harm consumers at a time when many are grappling with the economic fallout from the coronavirus, experts say.
"Does the government want to help people or not?" Barry Stricklin, chief lending officer for Tower Federal Credit Union in Laurel, Md., Asked. "Because that doesn't help people."
Lending to credit unions has declined overall since the coronavirus spread in March, and government officials have taken steps to slow the spread of the disease, including shutting down non-essential businesses. According to the National Credit Union Administration, earnings were down 40% year over year for the first quarter.
CUNA Mutual Group's August Credit Union Trends Report, which includes data through the end of June, predicts "sub-trend credit growth among credit unions due to the COVID-19 pandemic, low pent-up demand for durable goods and high for the next few years Uncertainty in the job market. "
Mortgages were an exception. According to the report, first mortgages rose more than 13% in June compared to the same period last year. In June, total loans increased 6.4% year over year. However, CUNA Mutual estimated that 92% of that growth came from mortgages.
The industry is concerned that the new fee will help.
The negative market fee, which is based on the loan amount and goes into effect on December 1st, does not affect all mortgages. Mortgage loans with a balance less than $ 125,000 are exempt from the fee.
Additionally, the fee only applies to loans originators want to sell to Fannie and Freddie. So it has no effect on mortgages that lenders want to keep on their books. This also applies to refinancing and no purchases.
The Federal Housing Finance Agency said in the announcement earlier this week, outlining the late implementation, that the fee was necessary to "cover projected COVID-19 losses of at least $ 6 billion," including $ 4 billion in credit losses associated with expected forbearance failures.
The delay is helpful for borrowers as they have more time to refinance before the fee is collected and costs rise, said Tracy Ashfield, president of the American Credit Union Mortgage Association. Still, the fee is "very significant and very serious," she added.
The fee would cost borrowers an additional $ 1,400 to refinance, on average, the Mortgage Bankers Association estimated when news of the fee first came out.
"It will significantly increase the cost of borrowing for people trying to refinance their homes," said Ashfield. “Many are in a difficult position. Low mortgage rates are a bright spot in our economy and a tremendous opportunity to improve your financial situation by being able to refinance yourself at these very low interest rates. "
Some experts questioned the rationale for applying the fee to refinancing only. Many consider refinanced mortgages to be less risky than buying because the move usually lowers the borrower's monthly payment. David Brickman, CEO of Freddie Mac, and Hugh Frater, CEO of Fannie Mae, said in a statement last week that purchase credits were excluded so as not to harm home buyers.
"You could argue that the refis don't deserve the fee, but here's the full volume," said Eric Schornhorst, strategic advisor at CU Solutions Group, a credit union service organization that provides lending and strategic planning products. "If it will make a difference [for the GSEs] it will be in the refis."
The credit unions could also choose not to pass the fee on to the borrowers and instead pay the costs themselves. Tower's Stricklin said this was a decision individual credit unions would have to make based on how tight their margins are. Most lenders will likely need borrowers to cover the fee to ensure the business remains profitable.
Stricklin estimates that currently 65% of Tower's mortgage business is refinances and 35% is purchases. The fee could add about $ 1,550 to refinance its members based on Tower's average loan amount.
The tower, with assets of $ 3.6 billion, had single- to four-family home loans of approximately $ 685 million on its books as of June 30, an increase of approximately 49% over the same period last year .
The negative market sentiment will make refinancing no longer financially viable for some consumers and it will hurt those who are most in need, Stricklin said.
This hurts not only consumers, who could have benefited from the current historically low interest rates, but also the credit unions who are currently struggling to place deposits in interest-bearing assets and whose fee income has fallen.
With the fee getting all the news, there is a fear that potential borrowers – who could lower their monthly mortgage payments by refinancing – will see this coverage and mistakenly believe it would be too expensive for them.
"It is very unlike anything the government is doing to help," said Stricklin.
Robert Perry, principal at financial advisory firm ALM First, was less concerned about adverse market fees that make refinancing less attractive to credit union members. He noted that mortgage profits are at their peak for some institutions and the overall fee has been relatively low. With that in mind, he thought some lenders might choose to pay the cost.
“Would you refi your loan for a 10 [to] 15 [basis point] rate cut? In most cases the answer is no. You wouldn't be saving enough to make it worth it, "said Perry." If you lower the rate from 4% or 5%, the economics probably make sense. "
Schornhorst said his credit union clients are more concerned about what will happen to loan defaults, what Congress will do about the next stimulus package and managing capital ratios after a deposit rush.
"Yes, the fee may not be fair to consumers, but the credit unions can manage it," he added. "Refinancing will still be in a lot of people's best interests, even though it won't be as good as it was before the fee."