Interest Rates Going Up by Rules, Not by Market

January 2nd, 2014

There are increases coming to mortgage interest rates due to several rule changes. One change is a proposed increase in the guarantee fees, also called the g-fees. This fee will increase 10 basis points, which is equal to 1/10th%. There are also increases coming to what I call add-ons. Add-ons are fees charged by Fannie Mae and Freddie Mac, that vary depending on credit score and down payment of each mortgage borrower.

Fannie Mae and Freddie Mac have said that at the direction of their regulator, FHFA (Federal Housing Finance Agency), which oversees Fannie & Freddie, they have to charge higher fees on loans to borrowers who don’t make large down payments or don’t have high credit scores. They will raise the fees they charge lenders to guarantee loans in an attempt to shrink their presence in the mortgage market, the FHFA said.

The new FHFA director Mel Watt will likely face heavy pressure by consumer groups and the real-estate industry to reverse this g-fee increase. As a matter of fact, over the weekend before Christmas, Mr. Watt stated that he intends to delay the increase in guaranty-fees recently announced.

The other changes that will increase add-ons take effect in spring of 2014, but will likely be phased in by lenders earlier. There is one fee reduction also listed in the announcement that helps offset some of the increase. You can review the entire announcement by. Below is some verbiage taken from the latest announcement:

  • The elimination of the Market Condition delivery fee, except for Mortgages secured by Mortgaged Premises located in the states of Connecticut, Florida, New Jersey and New York. The FHFA is eliminating this 25 basis point fee that Fannie Mae and Freddie Mac began charging in 2008 to deal with the costs of the adverse housing market, recognizing that the market has now improved. The fee will remain in the above four high cost states.
  • An increase in Indicator Score/Loan-to-Value (IS/LTV) delivery fee rates (see the chart below).
  • Raise its guarantee fees by 10 basis points (this is the one Mel Watt has said he will delay).

These fee increases come at an interesting time when you can argue that the market has seemingly pushed up rates in general over the last two to three quarters. As the Federal Reserve contemplates tapering and ending its bond buying program, which has kept mortgages rates low for a long, long while, it seems like we are stuck with a triple whammy starting early next year!

Below are two examples of how much the increases have measured in different scenarios:

  1. A borrower taking a 30-year fixed rate mortgage who has a credit score of 735 with a 10% down payment, would pay fees totaling 2% of the loan amount in spring of 2014, up from 0.75% now. The increase in this fee could raise the mortgage rate around 0.375%.
  2. Borrowers with larger down payments could also be affected, especially with lower credit scores. Fees for a loan with a 690 credit score and a 25% down payment would rise to 2.25% from 1.5%.

The fee increases below range anywhere from no change to 150 basis points. These fee increases can be passed on to borrowers in the form of higher interest rates, discount points, or some combination of the two.

The grid below reflects the revised delivery fee rates for specific credit score and LTV ratio combinations that will start in spring of 2014.

Effective for Settlements on or after April 1, 2014
Credit Score LTV Ratios
All Eligible
Product < 60% > 60% &
< 70%
> 70% &
75%
> 75% &
80%
> 80% &
85%
> 85% &
90%
> 90% &
95%
800 0.00% 0.25% 0.25% 0.50% 0.75% 0.75% 0.75%
780 & < 800 0.00% 0.25% 0.25% 0.50% 0.75% 0.75% 0.75%
760 & < 780 0.00% 0.25% 0.25% 0.75% 1.00% 1.00% 1.00%
740 & < 760 0.00% 0.25% 0.50% 0.75% 1.50% 1.50% 1.50%
720 & < 740 0.00% 0.25% 1.00% 1.25% 1.50% 2.00% 2.00%
All Eligible Product 700 & < 720 0.00% 0.75% 1.50% 1.75% 2.00% 2.25% 2.25%
680 & < 700 0.25% 0.75% 2.25% 2.50% 2.50% 2.50% 2.50%
660 & < 680 0.25% 1.25% 2.25% 2.75% 3.25% 2.75% 2.75%
640 & < 660 0.75% 1.50% 2.75% 3.25% 3.50% 3.00% 3.00%
620 & < 640 0.75% 1.75% 3.25% 3.25% 3.50% 3.50% 3.50%
< 620 0.75% 1.75% 3.25% 3.25% 3.50% 3.50% 3.50%

 

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.​

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