Fannie Mae and Freddie Mac, the two largest mortgage financiers in the world, on Wednesday night announced they would impose a 0.5% fee on every refinanced mortgage starting Sept. 1. Look for it to become an issue in the campaign.
The new fee “exposes President Trump to charges that he is trying to tax housing at the height of the economic crisis,” said Jaret Seiberg, managing director of Cowen Group, a Washington D.C. research firm. “That is a political liability for the president. We expect Democrats will exploit this.”
For borrowers refinancing their mortgages, the new fee probably will cost them about $1,400 per loan, according to the Mortgage Bankers Association. That’s money that could have gone toward bolstering the economy in the form of consumer spending, which accounts for about 70% of the nation’s GDP.
Typically, recessions mean lower rates for mortgages, which are packaged and sold as bonds, and that spurs homeowners to secure new mortgages to lower their monthly payments. The cash that’s freed up helps to counter-balance recessions and pull economies toward recovery.
“This announcement is bad for our nation’s homeowners and the nascent economic recovery,” the MBA statement said.
One of the leading Democrats in Congress has already made it an election issue. Rep. Maxine Waters (D-CA), the chairperson of the House Committee on Financial Services, called on the Federal Housing Finance Agency, the federal watchdog of Fannie Mae and Freddie Mac, to reverse the decisions of the two government-sponsored enterprises.
“Imposing thousands of dollars in additional costs on borrowers at a time when the administration is supposed to be working on methods to help families stay in their homes is just another example of tone-deaf policies put in place by Trump administration officials who could care less about helping the American people weather this pandemic,” Waters said. “I am urging the FHFA to reverse course immediately and allow homeowners a fighting chance.”
Waters criticized FHFA Director Mark Calabria for continuing his drive toward releasing the GSEs from conservatorship in the midst of the worst public health crisis in more than a century. While Fannie Mae and Freddie Mac announced the new fee, they couldn’t have imposed it without permission from the FHFA.
The new fees will help to raise capital at Fannie Mae and Freddie Mac, one of the steps they need to take to be released from the conservatorship imposed by the government in 2008 when they were seized because of insolvency.
Both of the mortgage financiers announced on June 15, shortly after the U.S. death toll from COVID-19 had passed 100,000, that they had hired financial advisors to help them prepare for a share offering. Fannie Mae, the bigger of the GSEs, said it has chosen Morgan Stanley while Freddie Mac said it will use J.P. Morgan. Together, the two mortgage companies guarantee more than half of the $11 trillion outstanding U.S. home loans.
“In light of market and economic uncertainty resulting in higher risk and costs incurred by Fannie Mae, we are implementing a new loan-level price adjustment,” the letter issued Wednesday night announcing the new fee from the larger of the two government-sponsored enterprises said.
Waters said the new fees were “part of Director Calabria’s inappropriate focus on taking steps to release the enterprises from conservatorship during a national emergency.”
The FHFA declined to comment on Waters’ statement.
On Thursday, following the Wednesday night announcement of the new fee, FHFA said in an email: “Based on their projected COVID-related losses, Fannie Mae and Freddie Mac (the enterprises) requested, and were granted, permission from FHFA to place an adverse market fee on mortgage refinance acquisitions.”
If the Democrats do decide to make the new fee a campaign issue, they have a candidate who is used to taking on the FHFA and the GSEs: Sen. Kamala Harris (D-CA), named on Tuesday as former Vice President Joe Biden’s running mate.
In 2011, when she was attorney general of California, Harris sued Fannie Mae and Freddie Mac over their foreclosure practices. In 2012, she called on Ed DeMarco, then the director of FHFA, to resign.
Harris had become known as the toughest negotiator among 49 state attorneys general who went up against the nation’s biggest banks to secure a $25 billion settlement for mortgage servicing violations in 2010. Some of those funds were set aside to reduce principals of mortgages that had been taken out at the height of the home-price bubble and now were worth much less than the mortgage that financed them.
She pointed out in a 2012 interview on KQED, a public television station in San Francisco, that the banks owned a small share of homes in foreclosure, and that the FHFA, the regulator of the largest mortgage holders – Fannie Mae and Freddie Mac – was refusing to discuss principal reductions.
“In fact, 62% of the mortgages in California are not owned by those five banks,” she said. “They’re owned by Freddie and Fannie, and so when I’m looking at those numbers, it forces the question: When is Fannie and Freddie going to come to the table and deal with their piece of this? And they’ve refused.”
During the foreclosure crisis, principal reduction was a standard method of dealing with commercial mortgages that were underwater, letting corporations off the hook for chunks of their mortgages after properties had sunk in value. But, the method was considered a “moral hazard” if given to American families who were struggling to make it through the Great Recession.
Families who were left paying off a $450,000 mortgage for a home that was only worth $300,000 often made the decision to walk away rather than remained chained to a situation that appeared hopeless.
“This guy DeMarco who heads up the agency has basically said he doesn’t agree with the idea of principal reduction – well, he’s wrong,” Harris said in the 2012 interview. “In the analysis that his staff has conducted, it’s correct to say that principal reduction does actually help to correct the market, but this guy won’t do it, so he needs to step aside. If he can’t do his job, he needs to step aside.”
This week, mortgage and banking groups decried the new fee announced this week, including the Independent Community Bankers of America.
The new fee “will negatively impact the sectors of the U.S. economy that have thus far weathered the steepest economic downturn in modern history,” the ICBA said in a statement. “This decision is contrary to recent legislative, regulatory, and administrative actions of Congress, the administration, the Federal Reserve and the U.S Treasury to support consumers, and the economy.”
If the Democrats want to join in the outcry against the Fannie Mae and Freddie Mac fee, they’ll have lots of air time next week to do so. The Democratic National Convention is scheduled for Monday through Thursday of next week, with speeches from across America as part of the nation’s first virtual nominating convention.