Freddie Mac, the second-largest provider of funding for U.S. home mortgages, will raise some fees on loans it finances, a sign it sees greater risks even for borrowers making regular payments.
The company, struggling to recover from the worst housing slump since the 1930s, will raise some so-called "delivery fees" in March to cover increased risks on loans covering large portions of a property's value, according to a bulletin dated Monday on its website.
The fees are charged to lenders, but will likely raise costs on many loans for both purchases and refinancings, including those already funded by Freddie Mac.
While Freddie Mac said its increases would generally have little impact on monthly payments -- perhaps less than $10 -- they may further chill refinancings that have already had a tepid response to record low interest rates, analysts said. Borrowers have been unable to refinance as banks tacked on additional requirements and property values eroded
"I fail to understand the logic of this policy when the agencies already own the credit risk, and the borrowers are making payments," said Paul Norris, head of structured bonds at Dwight Asset Management in Burlington, Vermont. "The last thing we need is more people giving up, more strategic defaults, and more delinquent loans."
While lower rates make a loan more affordable, they don't always reduce mortgage risk, a Freddie Mac spokesman said.
A BALANCING ACT
The move highlights the balance the government-chartered "agency" must make between protecting taxpayer funds as the housing market teeters, and providing the credit needed to preserve a fading recovery.
In September 2008, the U.S. government seized Freddie Mac and rival Fannie Mae and placed them in conservatorship. Since then, they've required more than $150 billion in capital from the U.S. Treasury to cover credit-related losses and the cost of dividends paid back to taxpayers.
Among changes, Freddie Mac will generally raise fees by 0.25 of a percentage point to 0.75 percentage point on mortgages with a combination of high loan-to-value ratios and/or lower credit scores.
However, even the most creditworthy borrowers would be affected unless they put 25 percent down, up from the 20 percent that has long been the minimum equity needed to escape the need for mortgage insurance.
"This makes 75 percent the new 80 percent," said Scott Buchta, head of investment strategy at Braver Stern Securities in Chicago, of the maximum loan taken without added fees.
One of the major changes is to account for properties with second liens, the spokesman said. Home equity loans and credit lines boost combined loan-to-value ratios, which when high, have a huge negative impact on loan performance, according to Amherst Securities' strategist Laurie Goodman.
Fannie Mae will likely follow with a similar move that will raise consumer costs, Glenn Schultz, head of structured product research at Wells Fargo Securities, said in a research note.
"We assess our pricing on an ongoing basis and make changes based on a variety of factors including the risk profile of loans sold to us and other market data," a Fannie Mae spokeswoman said in an e-mail.
FALLING HOME PRICES FORESEEN
Many economists have painted a sobering view of the housing market in recent months, expecting prices to fall further after a reprieve last year. Missteps at mortgage companies working with troubled borrowers have delayed foreclosure, creating a bigger backlog of properties that are likely to pressure home values as they hit the saturated market.
Existing home sales fell more than expected in October, the National Association of Realtors said on Tuesday.
"The changes help to ensure that we are adequately compensated for the continued provision of essential liquidity to the mortgage market, and are able to continue our support for affordable lending while being diligent stewards of taxpayer funding," Freddie Mac said in Monday's bulletin.
Charles Haldeman, Freddie Mac's chief executive officer, last month said the housing market would likely be still too weak in the next year for the government to cut its support. Freddie Mac and other government programs now provide 90 percent of all funding for U.S. home loans.
Freddie Mac stressed that the fees do not automatically result in a change to the amount a borrower pays, and added costs are likely to be "nominal."
If a lender applies a 0.25 point fee to an interest rate, it would add less than $10 to the monthly payment on a 5 percent, 30-year loan of $200,000, it estimated.
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