Credit unions fear planned GSE fee could cut into mortgage profits
Credit unions fear that a fee to be imposed by Fannie Mae and Freddie Mac on refinanced mortgages could dampen the otherwise booming business line.
Earlier this month, Fannie Mae and Freddie Mac said they would apply an “adverse market fee” of 0.5% to most refinanced mortgages, starting on Sept. 1, because of the current economic turmoil. The move was instantly met with widespread backlash from mortgage lenders and consumer groups, and the government-sponsored enterprises later pushed the implementation date back three months.
Despite the delay, credit unions are concerned that members could decide against refinancing their mortgage since the fee is likely to make it more expense to do so. That could cut into the industry’s profitability and hurt consumers at a time when many are struggling with the economic fallout related to the coronavirus, experts said.
“Does the government want to help people or not?” Barry Stricklin, chief lending officer of Tower Federal Credit Union in Laurel, Md., asked. “Because this isn’t helping people.”
Overall credit union lending has sagged since the coronavirus became widespread in March and government officials took steps to slow the spread of the disease, including shuttering non-essential businesses. First-quarter earnings were down 40% from a year earlier, according to data from the National Credit Union Administration.
CUNA Mutual Group’s Credit Union Trends Report for August, which includes data through the end of June, forecasts “below-trend credit union loan growth for the next few years due to the COVID-19 pandemic, little pent-up demand for durable goods and high levels of labor market uncertainty.”
Mortgages have been one exception to this. First mortgages surged by more than 13% in June from the same period a year earlier, according to the report. In June, overall loans increased by 6.4% year over year but CUNA Mutual estimated that 92% of that growth came from mortgages.
The industry is worried the new fee will cut into that.
The adverse market fee, which is based on the loan amount and takes effect Dec. 1, won’t affect all mortgages. Mortgage loans with a balance of less than $125,000 are exempt from the fee.
Additionally, the fee only applies to loans that originators plan on selling to Fannie and Freddie, so it won’t affect any mortgages that lenders decide to keep on their books. And it also affects refinances and not purchases.
The Federal Housing Finance Agency said earlier this week, in the announcement outlining the delayed implementation, that the fee was necessary to “cover projected COVID-19 losses of at least $6 billion,” including $4 billion in loan losses tied to expected forbearance defaults.
The delay is helpful to borrowers since it gives them more time to refinance before the fee is imposed and costs go up, 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 on average an extra $1,400 for refinancing, the Mortgage Bankers Association estimated when the news about the fee initially came out.
“It will significantly increase the cost of credit for people trying to refinance their homes,” Ashfield said. “Many are in difficult straits. Low mortgage rates are a bright spot in our economy and a tremendous opportunity to improve their financial situation by being able to refinance into these very low rates.”
Some experts questioned the rationale behind applying the fee only to refinances. Many consider refinanced mortgages to be less risky than purchases since 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 loans were excluded to avoid affecting homebuyers.
“You could argue that the refis don’t deserve the fee but that’s where all of the volume is,” said Eric Schornhorst, strategic adviser at CU Solutions Group, a credit union service organization that provides products for lending and strategic planning. “If it’s going to make a difference [to the GSEs], it will be in the refis.”
Credit unions could also decide not to pass the fee on to borrowers and instead cover the cost themselves, sources said. Tower’s Stricklin said that would be a decision individual credit unions would have to make depending on how tight their margins are. Most lenders will probably need borrowers to cover the fee to ensure the business line remains profitable.
Stricklin estimated that 65% of Tower’s mortgage business right now is refinances and 35% is purchases. The fee could add about $1,550 for its members to refinance based on Tower’s average loan amount.
The $3.6 billion-asset Tower had about $685 million in one- to four-family residential property loans on its books at June 30, up roughly 49% from the same period last year, according to call report data from the National Credit Union Administration.
The adverse market feel will mean that it will no longer make financial sense for some consumers to refinance, and it will hurt those that are most in need, Stricklin said.
That hurts not just consumers, who could have benefited from the current historically low rates, but also credit unions, which are struggling to deploy deposits into interest-earning assets right now and have seen fee income decrease.
Because the fee has been widely featured in the news, there are fears potential borrowers — who could lower their monthly mortgage payments through refinancing — could see this coverage and mistakenly believe it would be too expensive for them to do so.
“It is very contrary to everything else the government is doing to help right now,” Stricklin said.
Robert Perry, a principal at financial advisory firm ALM First, was less concerned about the adverse market fee making refinancing less attractive to credit union members. He noted that mortgage profits are at all-time highs for some institutions and overall the fee was relatively modest. Given that, he thought some lenders might decide to absorb the cost.
“Would you refi your loan for a 10 [to] 15 [basis points] decrease in rate? In most cases, the answer is no, you would not be saving enough for it to be worth it," Perry said. "If you are dropping it from 4% or 5% rate, then the economics would likely make sense."
Schornhorst said his credit union clients are more concerned about what will happen with loan delinquencies, what Congress will do in terms of the next stimulus package and managing capital ratios after facing an onslaught of deposits.
“Yes, the fee may not be fair to consumers, but credit unions can manage it,” he added. “It will still be in a lot of people’s best interest to refinance, though it will not be as good of a deal as prior to the fee.”