U.S. mortgage guarantee fee changes to hike borrowing costs in 2014

WASHINGTON Wed Dec 18, 2013 1:46pm EST

WASHINGTON Dec 18 (Reuters) - Many U.S. homebuyers will likely pay more for mortgages next year due to a new policy established by the U.S. housing finance regulator that is raising the fees on government-backed loans.

Fannie Mae and Freddie Mac, the two taxpayer-owned mortgage finance companies, will increase their guarantee fees in 2014 as part of an effort to reduce their presence in the mortgage market.

The Federal Housing Finance Agency announced the policy last week, and Fannie Mae and Freddie Mac laid out the specifics of how the new fees would work late on Monday. The move comes as FHFA acting Director Edward DeMarco finishes out his last days heading the agency.

Democratic Congressman Mel Watt of North Carolina was recently confirmed to head the FHFA, and he will have the authority to reverse the fee increases if he opposes them.

The hikes represent a 10 basis point across-the-board bump, the repeal of a 25 basis point upfront adverse market surcharge in every state but New York, New Jersey, Connecticut and Florida, plus a revamping of the risk-based fee structure that will mean borrowers with poor credit pay more. A basis point is one-hundredth of a percentage point.

Such fees are typically passed along to borrowers, resulting in higher mortgage rates. The FHFA said the combined impact is raising the average guarantee fee on a 30-year, fixed-rate mortgage by 14 basis points.

"Lenders appear worried that rates for these borrowers could jump as much as 40 basis points," Jaret Seiberg, a senior policy analyst at Guggenheim Securities, said in a research note.

FICO, owner of the credit-scoring formula often used by U.S. lenders, helps decisions such as applications for interest rates on home loans, which range from 300 to a top of 850.

The changes do not go into effect until March.

Fannie and Freddie said that many borrowers without a down payment of at least 20 percent and who have credit scores that range from 680 to 760 will wind up paying more.

"It is important to remember that this is the fee a borrower would have to pay to get the best rate. Lenders typically roll this fee into the cost of the loan, which drives up the rate the borrower pays," said Seiberg.

Fannie Mae and Freddie Mac purchase mortgages from lenders, which they either keep on their books or bundle into securities that they offer to investors with a guarantee. They do not make loans, but provide liquidity to the mortgage market by taking mortgages off the books of lenders, freeing them to make more loans.

The companies currently back more than half of all U.S. home mortgages and are sweeping their profits from the housing recovery to the U.S. Treasury. Taxpayers have propped up Fannie and Freddie to the tune of $187.5 billion in bailout funds since they were seized by the government in 2008, but they have paid $185.2 billion to the Treasury in dividends for that support.

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