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Nixed Adverse Market Fee Makes Refinancing More Affordable

New leadership at the FHFA eliminated the much-despised adverse market fee, reducing the cost of many conventional loan refinances.

July 21, 2021
July 21, 2021
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Refinancing is getting a lot more affordable..

Rates are dropping to 5-month lows, and at the same time, a much-despised fee has been eliminated.

Government-Sponsored Enterprises (GSEs) Freddie Mac and Fannie Mae required lenders to pay the “Adverse Market Refinance Fee” upon issuing most conventional refinance mortgages. This cost was often passed on to borrowers, often resulting in about $500 in extra costs per $100,000 borrowed or a 0.125-0.25% increase in rate, according to Mortgage News Daily.

Elimination of the fee comes weeks after a Supreme Court decision allowing President Biden to remove and replace former FHFA director Mark Calabria, who instituted it in December 2020.

Refinancing is starting to pencil out again

Refinancing just became way more attractive.

According to Freddie Mac, the average 30-year fixed rate just dropped to 2.88%, beating levels not seen since the third week of February.

Combine that with lower fees and rates, and a refinance might just “pencil out” for many homeowners.

For instance, someone with a 3.5% rate probably wouldn't consider refinancing into 3.25%. Closing costs are too great to justify such a small rate decrease.

But imagine a mortgage quote in the high 2s thanks to lower market rates and lower fees. That kind of rate drop should make many homeowners pay attention.

The adverse market fee applied to most conventional refinance loans so there’s a good chance many homeowners can now get a lower quote than they received just weeks ago.

Eliminating the fee will make it cheaper for lenders and, in turn, borrowers to complete refinance transactions.

The policy change is welcomed by homeowners and the industry alike. The Mortgage Banker’s Association celebrated the action and many lenders have already implemented rate changes.

An effort to support affordable housing

In a press release from the FHFA, Acting Director Sandra Thompson said the action furthers the FHFA’s priority of supporting affordable housing.

“Eliminating the Adverse Market Refinance Fee will help families take advantage of the low-rate environment to save more money," Thompson said.

According to the press release, the adverse market fee was designed to cover projected losses at Freddie Mac and Fannie Mae due to the pandemic. However, critics claimed that it was part of the former director Calabria’s plan to disconnect Freddie and Fannie from the government.

David Stevens, former Federal Housing Commissioner at the U.S. Department of Housing and Urban Development (HUD), said the following back in November 2020:

“I would argue that this was done simply because FHFA director Mark Calabria saw an opportunity to build capital more quickly to achieve his stated goal of releasing the two companies from conservatorship.”

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