INSIGHTi

The GSEs’ Adverse Market Refinance Fee
August 25, 2020
Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs), were chartered by
Congress to provide liquidity for both the single- and multi-family mortgage markets. In the years
following the housing and mortgage market turmoil beginning in 2007, the GSEs experienced financial
difficulty. On September 6, 2008, the Federal Housing Financial Agency (FHFA), the GSE’s primary
regulator, took control of them from their stockholders and management in a process known as
conservatorship. FHFA has since implemented various initiatives to improve the GSEs’ financial
conditions, and it has recently prioritized their exit from conservatorship. Specifically, the GSEs are now
being allowed to accumulate capital reserves to buffer against mortgage default risks, and FHFA has re-
proposed a rule to establish a capitalization framework that would be in place following their return to
stockholder control.
On August 12, 2020, both Fannie Mae and Freddie Mac announced an adverse market refinance fee of 50
basis points (0.5%) on the cash-out refinance loans purchased by the GSEs as of September 1, 2020. The
fee would also apply to Fannie Mae’s limited cash-out refinance and Freddie Mac’s no cash-out refinance
products, which cap the amount of home equity borrowers can withdraw, typically to roll some or all of
the closing costs into their mortgages. (For both GSEs, single-close construction-to-permanent refinances
would be exempt from the fee.) If, for example, a lender sold a refinanced mortgage of $300,000 to a
GSE, the lender would be charged a fee of 0.5%, or $1,500.
The additional revenue collected by the GSEs could be used for multiple purposes. In general, the GSEs
guarantee investors in their mortgage-backed securities (MBSs) timely repayment of principal and interest
generated from the underlying mortgages linked to the MBSs. By granting forbearance (i.e., deferred
mortgage payments) to borrowers adversely affected by the Coronavirus Disease 2019 (COVID-19)
pandemic, some mortgages are not generating cash flows even though they technically are not in default.
For this reason, the GSEs may be experiencing challenges to their cash flows by attempting to forward
payments to investors that hold their MBSs while simultaneously providing forbearance to borrowers
affected by COVID-19. The revenue generated by the 0.5% fee could offset these cash flow pressures
facing the GSEs and allow them to continue meeting their payment obligations without experiencing
severe cash flow shortfalls. Given that the GSEs have received funds from Treasury while under
conservatorship, the 0.5% fee might reduce or abate the need for additional support. If fewer forbearances
and defaults than anticipated occur such that cash flow disruptions are averted, the additional revenues
could also be used to accumulate more capital reserves to facilitate the GSEs’ exit from conservatorship
sooner rather than later. Predicting how much revenue the fee would generate for the GSEs is difficult
Congressional Research Service
https://crsreports.congress.gov
IN11489
CRS INSIGHT
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because of the challenges in predicting how many additional homeowners would refinance by September
1, 2020, particularly given that many people have already refinanced.
When a tax or fee is imposed on a product or service, it can be paid by either the demand or supply side of
the market in relatively equal or unequal portion sizes. Likewise, after the 0.5% fee is imposed on a
refinanced mortgage product, either the borrowers or mortgage originators can pay relatively equal or
disproportionate amounts. For this reason, the effects of the 0.5% fee on borrowers and mortgage
originators are uncertain.
 Mortgage originators might be able to pass some or all of the fee onto borrowers. As previously
stated, borrowers could opt to roll the additional fee into the mortgage and pay it over the life of
the loan. Alternatively, some or all of the 0.5% could be rolled into the closing costs fees.
Originators are required by law to disclose the fees borrowers pay when they close on a
mortgage; however, the higher fees still may not deter some borrowers from refinancing
especially if their total mortgage cost savings over time would substantially offset the 0.5% fee.
 If unable to pass all or a large portion of the fee onto borrowers, then originators could adjust or
switch business models. One response could be to stop selling eligible mortgages to Fannie or
Freddie particularly for firms in which originating mortgages is not a significant part of their
overall business models. Originators that are principally engaged in collecting origination fees
from large volumes of mortgages for sale to the GSEs, however, would consider whether they can
still generate sufficient revenues to cover most of the expenses per loan. If their primary source of
income is generated from mortgage origination fees, then it could become difficult to quickly
switch from and adopt new business models despite incurring higher costs.
Some Members of Congress have expressed concern, some directly to FHFA, regarding the fee.

Author Information

Darryl E. Getter

Specialist in Financial Economics






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