By the Numbers

Fannie Mae, Freddie Mac reshape mortgage fees

Brian Landy, CFA | January 20, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Fannie Mae and Freddie Mac will cut the cost of mortgage debt used to purchase homes for borrowers with low credit scores or small down payments and for certain investors and multi-unit properties, the agencies have announced. But the cost of debt used to purchase a home for borrowers with high scores will rise, as will costs for most refinancings. The changes will take effect in May, adding to changes planned in February for cash-out refinancings. The change in costs should tilt agency MBS supply and borrower refinancing incentives.

Changes to fees on purchase loans

Upfront fees for a purchase mortgage will drop under the new agency plan for most borrowers with credit scores less than 680, and for loans with loan-to-value ratios above 95% (Exbibit 1). But most borrowers with credit scores above 680 and LTVs between 70% and 95% will pay more for a purchase mortgage. Loans seeing lower upfront fees, also known as loan level price adjustments or LLPAs, should see faster speeds while loans assessed higher fees should prepay more slowly.

Exhibit 1. Many borrowers will pay lower fees to buy a home while fees rise for high FICO, high LTV borrowers

Note: The table shows the difference between the current fee and the new fee. Green cells highlight lower fees and potentially faster speeds, while red cells will be assessed higher fees and could prepay more slowly.
Source: Fannie Mae, Freddie Mac, Amherst Pierpont Securities

Fees are also changing for certain loan types. Fees for investment properties with less than a 70% loan-to-value ratio are falling and will match the fee charged for second homes. Fees are also going down for 2-to-4-unit properties, which might help lower rents for the additional units in those properties. On the other hand, Fannie Mae and Freddie Mac plan to charge a new fee to most borrowers with debt-to-income ratios over 40%. There are also minor increases for some adjustable-rate mortgages and loans for condominiums.

Although the fee matrix includes a category for loans with LTV above 95%, neither Fannie Mae nor Freddie Mac is currently acquiring conventional loans with LTV over 97%, since each enterprise suspended its high LTV refinance programs after the qualified-mortgage rules were finalized in early 2022. For example, Fannie Mae’s product eligibility matrix shows only high LTV refinances allow an LTV ratio above 97%.

Changes to fees for refinancing

Most borrowers are going to pay more to refinance their loan when these changes take effect (Exhibit 2). Most borrowers with a credit score 680 or higher will pay higher fees, and many borrowers with lower credit scores will pay higher fees. Some borrowers will pay less, but those changes are narrowly targeted. Refinance borrowers will be assessed the fee for high DTI ratios and pay less for low LTV investment properties and for 2-to-4-unit properties. These changes are the same as for purchase loans.

Exhibit 2. The cost of a refinance is increasing for most borrowers.

Source: Fannie Mae, Freddie Mac, Amherst Pierpont Securities

Fannie Mae and Freddie Mac had already announced that fees for cash-out refinances would change in February, so there are not many additional changes planned for May (Exhibit 3). But some borrowers will pay lower fees—those with credit scores at least 760 and loan-to-value ratios above 60%, and borrowers with credit scores below 740 and loan-to-value ratios no higher than 30%. The fees for investment properties, 2-to4-unit properties, and high DTI scores receive the same changes as for purchase loans and rate/term refinances. The GSEs do not allow cash-out refinances with LTVs above 80%.

Exhibit 3. Borrowers with very high credit scores will pay less for a cash-out refinance.

Source: Fannie Mae, Freddie Mac, Amherst Pierpont Securities

Finally, the upfront fees are also changing for loans with second liens. The new fee will be assessed solely using the loan’s LTV ratio. The previous LLPA depended on LTV, combined LTV that includes the subordinate financing, and credit score. Most borrowers with a second lien will pay a higher fee after this change.

A muted effect on prepayment speeds

The effect on prepayment speeds is likely muted for most loans, which are trading at deep discounts to par and have little incentive to refinance. Loans originated within the last year, however, may react more to the fee changes. Some borrowers could receive a mortgage rate that is 25 bp higher or lower after these changes take effect. Generally, low credit borrowers will become more refinanceable, and high-credit borrowers will become less refinanceable. The pools most likely to be delivered into TBA contracts typically have higher credit scores, so it is likely that higher coupon TBAs will become less refinanceable and add convexity. Specified pool pay-ups may fall slightly in response.

Fannie Mae’s new pricing matrix is here, and Freddie Mac’s is here.

Brian Landy, CFA
brian.landy@santander.us
1 (646) 776-7795

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.