Freddie Mac Joins Fannie in Raising Mortgage Fees (Update1)
By Jody Shenn
Nov. 15 (Bloomberg) -- Freddie Mac, the second-largest source of money for U.S. home loans, joined Fannie Mae in introducing or raising fees on mortgages the company buys from lenders because of the increased risks in slumping housing and mortgage markets.
Freddie Mac is primarily setting new fees for mortgages made to borrowers with credit scores below 680, whose loans exceed 70 percent of their property's value. The new charges range from 0.75 percent to 2 percent depending on credit scores, according to a bulletin by the company. The changes take effect March 1.
The higher fees by Freddie Mac and Fannie Mae follow an 81 percent drop over the past year in the market for new mortgage securities without guarantees from the government-sponsored enterprises. The tightening of lending standards that's resulted has worsened defaults by borrowers unable to refinance rising adjustable-rate loans and has limited home sales and prices.
``Classic economics will tell you reduce the price of an asset when you reduce the amount of potential buyers,'' said Rod Dubitsky, head of asset-backed research in New York for Credit Suisse Group. ``And when it's Fannie Mae or Freddie Mac, it's different than Joe the Community Bank doing it.''
Fannie Mae and Freddie Mac own or guarantee about 40 percent of the $11.5 trillion in U.S. residential-mortgage debt. Both companies are also raising fees for loans on two-unit homes.
Freddie Mac's changes are ``in response to continuing volatility and turmoil in the mortgage market, including the deteriorating performance of higher-risk mortgage products,'' the McLean, Virginia-based company said in a letter on its Web site.
It also said mortgages from markets with falling prices must now have loan-to-value ratios at least five percentage points below normal requirements for mortgages with the same attributes.
Consumers Feel It
The new fees will affect consumers, said Dan Arrigoni, head of Minneapolis-based U.S. Bancorp's mortgage unit.
``What we have to pay gets passed on, no question about it,'' Arrigoni said in a telephone interview. Rick Aneshansel, the chief financial officer for the unit, said that the changes would affect more than 1-in-10 so-called agency mortgages.
Washington-based Fannie Mae announced its higher pricing on Nov. 6. The companies' fees also apply to loans they securitize for lenders.
Congress created Fannie Mae and Freddie Mac to boost mortgage financing and provide market stability. The companies make money by holding mortgage assets and by guaranteeing mortgage-backed securities created out of loans from primary lenders.
$2,250 Fee
Under Freddie Mac's new fee system, a lender selling a mortgage to the company from a borrower with a credit score of 675 who made less than a 30 percent down payment for the purchase of a $300,000 home will forfeit $2,250 in charges. The lender, which would typically make less than $3,000 on the sale, could get paid more by raising the interest rate on the loan.
Last week, Fannie Mae said its third-quarter loss more than doubled to $1.39 billion, as the housing slump boosted credit- related expenses to $1.2 billion. Freddie Mac is scheduled to report earnings next week.
Fannie Mae fell $4.78 today, or 10 percent, to $43.04 in New York Stock Exchange trading after an article on Fortune magazine's Web site said the company may have been understating bad loans. Freddie Mac fell $2.33, or 5.2 percent, to $41.86.
Issuance of mortgage securities without guarantees from Fannie Mae, Freddie Mac or government agency Ginnie Mae plunged to $19 billion in October, according to Friedman Billings Ramsey Group Inc., an Arlington, Virginia-based securities firm.
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net .
Last Updated: November 15, 2007 16:11 EST |
