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Congress Increases Mortgage Fees
Legislation Will Raise Mortgage Rates and Cuts Mortgage Insurance Tax Deduction.   

 

by Keith Luedeman, CEO   

 

 

News 

1/13/2012 - Congress Funds Payroll Tax Credit by Adding GSE Fees to Mortgage Rates.

In late December, Congress and President Obama passed a "no less than" 10 Basis Point increase in GSE Fees for all mortgage loan products offered by Fannie Mae and Freddie Mac to fund a two month extension of a payroll tax cut.  FHA and VA Loans are also included in this bill.  This shift in the tax burden to homeowners and home buyers will remain in effect until October 2021.
 
This is for all new mortgages that are written to Fannie Mae, Freddie Mac, FHA or VA guidelines, either for a new home purchase or a refinance.  Currently Fannie and Freddie, FHA and VA loans are a vast majority of all new home loans.  Note: For your existing home mortgage - nothing will change in terms of this fee or additional payment, as this is for new loans only.
 
The impact of this bill will be to increase the cost to homeowners by about $15 per month or $330 per year for each $200,000 borrowed.  Ironically, this is approximately the same $330 savings a family making $100,000 a year will receive with two months of a reduced payroll tax.  However, the tax savings is a one time event, while the increased mortgage costs are for an estimated 5 years, as that is about the traditional length of time someone will keep a mortgage before moving or refinancing.

How Increased GSE Fees Will Raise Rates

• When you get a loan, it's generally put into a Mortgage Backed Security.  The bondholder receives a portion of your payment, and the servicer and Government Sponsored Entity (Fannie Mae is a GSE) also have some fees. 
 
• For example, if you obtain a mortgage at 4%, the mortgage will be put into a 3.5% Mortgage Backed Security.  The remaining .5% (or 50 Basis Points) will be split as follows - Fannie Mae or another GSE would receive 20 Basis Points and the servicer would receive 30 Basis Points.  This is how the servicer funds the servicing of your loan (which includes coupon books, tracking late payments, distributing escrow funds for taxes and insurance, payments to bond holders, customer service, and foreclosure if you don't pay). 
  
• The 20 Basis Points that Fannie Mae received above will be going up to 30 Basis Points. 
 
• This 10 Basis Point addition means your rate will be 10 Basis Points higher - which is about 1/8th of a point.  On a $200,000 mortgage, that's about $15 a month.
 
What is Happening Now

• This increase is for mortgage loans put into Mortgage Backed Securities as of April 1, 2012.  However, that means loans closing after about February 10th, 2012 are put into these Securities as it takes about 45 days for your closed loan to be routed into one of these Mortgage Backed Security packages.  Keep in mind even the largest banks put loans into Mortgage Backed Securities, though they make keep the servicing of the loan. 
 
• If your rate is currently locked, make sure you close on time, or you will have larger than normal extension cost.  These lock extension costs could be up to 50 Basis Points (1/2 point) which is about the amount it takes to buy down a rate by 1/8th of a point.
 
• If you are considering refinancing, you may see a slight jump in rates as you go to lock in.  All lenders are on a level playing field, so it won't make a difference which mortgage lender you use for your new mortgage loan, as the largest banks to the smaller mortgage lenders will pass along this fee.
 
• Rates could go up more in the future as new fees are added per the legislation.  The statement from the Federal Housing Finance Agency (FHFA) also includes the following language: "In early 2012, FHFA will further analyze whether additional guarantee fee increases are appropriate to ensure the new requirements are being met. FHFA will announce plans for further guarantee fee increases or other fee adjustments that will then be implemented gradually over the two-year implementation window, taking into consideration risk levels and conditions in financial markets. FHFA will monitor closely the increased guarantee fees imposed as a result of the new law throughout its effective period, which ends Oct. 1, 2021.”
 
• As part of this bill, the tax deduction for Mortgage Insurance was also removed (you pay mortgage insurance if you put down less than 20% when you bought your home).  This tax break has been around since 2006.  It had been renewed each year since, but was allowed to expire this year. 
  
For the full statement - see http://www.fhfa.gov/webfiles/22982/GFEESTMT122911F.pdf  and read more at Freddie Mac's Website - http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1126.pdf

 

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