Cost of Home Loans to Skyrocket in 2011

Home prices may be down, but the cost of your home loan is headed up, up, up according to Fannie Mae’s memo to lenders in late December. In the New Year, the government-controlled GSE will impose a new schedule of higher add-on fees similar to what Freddie Mac implemented around Thanksgiving 2010[1]. The result will be that loans themselves will actually cost thousands more in some cases – even if the borrower boasts high credit scores and a substantial down payment.

The fees, which are based around the perceived risk in loaning to a borrower, start at the top and will apply even to people who previously were able to qualify for low-cost and no-cost loans thanks to good credit and cash on-hand. For example, a borrower with an 800 credit score and 25 percent of a down payment will still be paying an additional quarter of a percentage point on the sum of the loan amount in most cases, whereas in 2010 this great-looking borrower would have had a zero-cost loan due to their virtually nonexistent risk of default. Higher-risk borrowers and those with lower down payments will likely see multiple percentage points added to the costs of their loans.

Additionally, both GSEs will be adding costs to loans based on the type of real estate you wish to purchase. For example, a loan on a condo will be more expensive than a loan for the same amount on a standalone house. Rental investments will get “significantly higher costs” according to reports. These government lenders have already required $150 billion in government “financial infusions” since 2008, and they continue to fund or guarantee more than two-thirds of new mortgages. Real estate analysts have voiced concerns that these new add-ons could dramatically slow an already-sluggish market recovery, but Edward J. DeMarco, acting director of the Federal Housing Finance Agency, calls the additional fees “necessary to protect [the GSEs] from costs and risks inherent in the mortgages they buy or guarantee” in an open letter to “Capitol Hill critics.” Essentially, he added, these fees are to make up for the GSEs’ “underpriced mortgage credit risks” during the first half of the past decade.

This year Congress and the administration are supposed to determine whether or not the time has come to phase Fannie and Freddie out completely. Do you think it’s time for them to go?

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