Government LendingRegulatory

What happens to the refi fee if Biden wins?

A Biden win would mean "all bets are off," Beacon's Myrow says

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After an industry outcry, the Federal Housing Finance Agency on Tuesday said it would delay until Dec. 1 the implementation of the 0.5% adverse-market fee on refinanced mortgages purchased by Fannie Mae and Freddie Mac.

That’s almost a month after the Nov. 3 presidential election. If former Vice President Joe Biden usurps President Donald Trump, all bets are off, said Stephen Myrow, managing partner of Beacon Policy Advisors in Washington, D.C. Even if the FHFA goes ahead with the fee, it could be reversed by a Biden administration who likely would stop plans to recapitalize and release the two companies, he said.

“It’s all dependent on the election,” Myrow said. “The Democrats are going to move to keep Fannie and Freddie under government control because they want to give more support to housing. No one thinks having them in conservatorship is a perfect situation, but realistically they would see it as better than them being private companies.”

The fee, announced the night of Aug. 12 with no warning to lenders who had locked deals in their pipelines, originally was set to go into effect on Sept. 1, leaving just 13 business days for companies to adjust.

In the FHFA announcement delaying the fee, the agency said the new revenue was needed to cover the costs of forbearances and future loan modifications. The CARES Act gives borrowers with Fannie Mae and Freddie Mac mortgages the right to 12 months of suspended payments because of the COVID-19 pandemic.

In addition to covering potential future losses, Fannie Mae and Freddie Mac were trying “to exit conservatorship by showing they can raise prices,” said Jaret Seiberg, managing director at Cowen Group.

The fee will help the companies recapitalize as they make their way toward being released from federal ownership through a long-planned stock offering. Fees are a lucrative source of revenue for both of the mortgage giants, according to their quarterly earnings reports.

The fee adds an average of $1,400 to the cost of refinancing a mortgage, according to the Mortgage Bankers Association. The cost typically is passed on to borrowers.

Last week, prominent Democrats including Sherrod Brown, (D-OH) and Elizabeth Warren (D-MA) sent a letter to the FHFA asking why homeowners were being asked to bear the cost of the economic downturn, instead of the companies.

Even if the FHFA still goes forward with the new fee on Dec. 1, it could quickly be reversed by a new administration, especially since a Supreme Court decision in June gave the president the right to replace heads of single-director agencies such as the Consumer Financial Protection Bureau and the FHFA, Beacon’s Myrow said.

FHFA Director Mark Calabria, a Trump appointee, doesn’t have the option of completing the release of the GSEs before inauguration day, Myrow said. It wouldn’t work because the uncertainty would spook investors, he said.

“Who is going to buy the stock if Biden wins on Nov. 3?” he said. “If they managed to take them out of conservatorship in between the election and the inauguration, there’s no guarantee the Biden administration wouldn’t put them back into conservatorship.”

When the world’s two largest mortgage financiers were seized by the government, it was Republicans who were in charge. It was Sept. 7, 2008, a rainy Sunday in Washington, when President George W. Bush announced he had directed Treasury Secretary Henry Paulson to take over Fannie Mae and Freddie Mac.

The two companies had no part in lending subprime mortgages – their loans had much higher standards – but they had invested in subprime bonds as a way to fulfill their mandate from Congress to support affordable housing.

The government wiped out most of the value of the shares and took $1 billion in their senior preferred stock, giving taxpayers ownership of 79.9% of each company. Stocks that had once traded at more than $60 and were considered as safe as Treasury bonds because of their implied government backing were suddenly worth pennies.

A dozen years later, the two mortgage companies that back about half of America’s outstanding home mortgages are no less important to the nation, Myrow said.

“If Biden wins, he’ll appoint a new director, and then it will be up to Congress to figure out what to do,” Myrow said. “If Trump wins reelection, Calabria will have the pathway to go ahead and do what he wants.”

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