Mary E. Noons is executive vice president and chief retail lending officer for The Washington Trust Co. She has more than 25 years of professional mortgage and consumer origination and operations experience. She earned a bachelor’s degree from the University of Rhode Island and also graduated from The Connecticut School of Finance and Management.
PBN: How has COVID-19 impacted mortgage activity – both new loans and refinancing? Are there other factors that have led to an increase in mortgage earnings for Washington Trust?
NOONS: The general economic impact of COVID-19 has led to a historic drop in interest rates. The Federal Reserve decided early in the pandemic to focus on making money accessible by reducing the Fed Funds rate to near 0%. They also increased their purchases of mortgage-backed securities, which has helped reduce mortgage rates to all-time lows.
The home purchase market nationally has held up nicely but is particularly strong in the markets in which we are active in – R.I., MA and CT. There are not enough properties on the market to meet the demand and the result is, in general, homes that are rationally priced are receiving offers very quickly. Many are being sold at or above the asking price.
While purchase activity has been fairly robust, the real story on COVID-19 impact has been on refinancing activity. With mortgage interest rates hitting new lows, the opportunity for homeowners to refinance and save money every month is a big benefit. Housing costs are typically the biggest household cost and the chance to reduce that is meaningful to families. A 1% drop in interest rates on a $200,000, 30-year mortgage loan saves $1,464 a year. Some borrowers are opting for a reduced term such as a 15- or 20-year mortgage. Because rates are so low, they may trade a higher but reasonable payment to be mortgage-free sooner.
PBN: Do you anticipate that mortgage refinancing activity will decrease with the new adverse market fee Fannie Mae and Freddie Mac are going to start charging on Sept. 1?
NOONS: With all the Federal Reserve actions to ease rates and congressional actions to ease the burden on Americans with forbearance offerings and the previous foreclosure and eviction moratoriums, it is curious why this refinance fee would be implemented given its impact on homeowners. The fee is not insignificant – it is a half-point cost for nearly all refinances for conforming mortgage loans. Conforming mortgages meet the qualifications to be sold to or guaranteed by Fannie Mae and Freddie Mac. The net effect may be a 0.125% to 0.25% increase in the interest rate for a refinance. As the interest rates are still extremely low, I believe that there will still be a high demand for refinances.
While the fee is new, we have not seen a dampening effect on refinance application activity as of yet. It still makes sense for people to reduce their rates or refinance into another attractive product to reduce their term, even if the rate or origination cost is higher than it would have been a few weeks ago.
PBN: What are the implications of this fee for borrowers? What about lenders?
NOONS: The half-point fee will generally be borne by the borrowers, just as other Fannie Mae and Freddie Mac fees for certain other loan factors have been for many years since the inception of their risk-based pricing. This fee is mostly paid in the form of a slightly higher interest rate as the 0.125% to 0.25% referenced above.
The near-term effect for lenders is that the fee was mandated without any consideration to the loans that are already in our pipelines. Fannie Mae and Freddie Mac typically do not implement these types of changes so immediately. In this case, many lenders will be absorbing the costs of this fee implementation themselves because of regulatory considerations, but also because it does not seem fair to charge borrower’s terms simply because Fannie Mae and Freddie Mac implemented a new fee.
PBN: What will happen with borrowers who have already locked in a mortgage refinancing rate with the bank but are waiting to finalize the loan? Will they also be charged the new fee?
NOONS: Washington Trust will not be charging those people who locked their interest rate with us prior to the fee’s announcement. Some other lenders may be charging the fee on loans locked prior and for those where the current rate lock extends beyond its original expiration date. I would encourage anyone who may be in either situation to contact their lender immediately.
PBN: Fannie and Freddie charged a similar fee during the 2008 financial crisis. What effect did that have, generally and at Washington Trust, on mortgage activity? Will the reaction be different this time?
NOONS: The fees that were put into place previously were truly risk-based and are called loan level pricing adjustments, or LLPAs. For example, the fees were based on certain tiers of credit scores, higher loan-to values, if there was a cash-out refinance versus a refinance that just affected the rate and term of the loan, etc. Those were big changes and, initially, the fees did have an effect on mortgage activity.
However, the mortgage industry in particular and the world economy as a whole were in upheaval and … worsening daily, weekly, monthly. The fees turned out to largely be a non-story in light of the rest of the market conditions. In the end, everyone knew that Fannie and Freddie were under scrutiny and were in financial trouble, so while inconvenient, the fees were accepted.
Subsequent fees have not been as easy to understand. For example, in 2012 there was a 10 basis point fee added to MBS guarantee fees – not to bolster Fannie and Freddie but to partially offset the cost of the Temporary Payroll Tax Cut Continuation Act of 2011 – something that is obviously not mortgage related. This new fee is called the Adverse Market Refinance Fee. While the firms have stated that the fee is intended to offset risks and expenses due to COVID-19, it is unclear what the “adverse market” is and how this fee would help protect Fannie and Freddie. However, it is clear that homeowners who are well-qualified to refinance their mortgage loan will be paying more to do so.
Nancy Lavin is a staff writer for the PBN. Contact her at Lavin@PBN.com.
