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What's Up With Fannie and Freddie?

Mortgage interest rates might be low, but some consumers will be looking at increased fees on home loans starting April 1, 2009, The Washington Post columnist Kenneth Harney wrote February 14, 2009.

Fannie Mae and Freddie Mac are increasing mandatory fees and toughening credit score and down-payment rules starting next month.

"Most major lenders already are pricing in these higher fees, effectively raising costs to borrowers immediately and reducing the impact of housing stimulus efforts from Congress and the Obama administration."

Under the new guidelines, even potential borrowers who assumed that their FICO credit scores would get them favorable rates will be charged more unless they can come up with down payments of 30 percent or more. For example, a buyer with a 699 FICO score who brings a sizable down payment of about 25 percent to the closing will be hit with a 1.5 percent "delivery" fee at closing.

A buyer with a FICO score between 700 and 720 will pay an extra three-quarters of a point. Even someone with a FICO score from 720 to 739 will pay a quarter-point fee.

Condominium buyers who cannot come up with a 25 percent down payment will be hit with a three-quarter point penalty fee, no matter how high their credit score, simply because they are not purchasing a traditional detached, stand-alone house. That's unfair.

"Buyers of duplexes, where one unit is owner-occupied and the other is rented, will be charged a flat 1 percent fee from Fannie, even if they have FICOs above 800 and make 50 percent down payments. Refinancers who take cash out at settlement also will be forced to pay extra, as much as three points if they have low credit scores and modest equity stakes."

Both Fannie Mae and Freddie Mac report that the extra fees are necessary to counter higher risks and losses associated with certain loan products and borrowers.

In other words, people with decent credit and a down payment are paying for the deadbeats with lousy credit and no money down who borrowed money a few years ago.

Losses for the two companies have increased due to declining home values in many parts of the country. Homes are worth a lot less after foreclosure.

"Although they were quasi-private enterprises until September, Fannie and Freddie now are operating under federal control and are bleeding billions of dollars of red ink. Freddie spokesman Brad German said that some of the loan categories and credit risk combinations targeted in the latest round of fees 'default at four to eight times' the rate of other mortgages in the company's portfolio. 'We have to manage these risks appropriately,' he added, and that means pricing them based on the probability of higher losses."

Sure, some borrowers are a greater credit risk than others, but Fannie and Freddie are charging consumers with, for example, 700+ credit scores and 20 percent down payments more fees because they can, plain and simple. It seems that people who have a history of paying their bills on time and using credit wisely are being penalized by many recent government and corporate policies.

It's ridiculous and counterproductive in an environment in which real estate markets around the country need a shot in the arm, not roadblocks to getting home buyers into homes.

The National Association of REALTORS® and other industry groups oppose the new fees and plan to lobby Congress and federal regulators to back off the new guidelines.

"As recently as two years ago, FICO scores in the upper 600s were enough to qualify any applicant for prime financing. Now scores of 720 to 740 are the bare minimum if you're going to escape add-on fees -- and still not good enough if you choose to buy a condo or a duplex."

There is an alternative available for just about anyone who wants to avoid these new fees: Federal Housing Administration (FHA) mortgages, where down payments go as low as 3.5 percent and credit scores are far less of an issue for most potential borrowers.

Get a referral for a competent, honest, mortgage professional.

Read The Washington Post Column.