In order to understand their changes, we must first understand how Fannie and Freddie operate. Fannie and Freddie don’t actually product mortgages, they do however buy mortgages from private lenders to ensure the lenders can take the risk on the loan in case it is defaulted on. This is what make it possible for you and I to get a 30 year loan. You may or may not realize it, but most countries don’t have this luxury. In some parts of the world, you have to have the money to buy a house or else you can’t have one.
Fannie and Freddie charge the lender fees in exchange for this risk security. These fees allow Fannie and Freddie to generate a profit as well as build cash reserves in case of catastrophic events in the housing market.
These fees are then funneled down to the borrower, so when Fannie or Freddie change their fees, it affects our mortgages.
While the bulk of the fees remained constant, there are some components that will affect some people. Starting September 1st, 2015 fees on loans for investment properties, mortgages that have secondary loans, and cash-out refinances will increase.
According to Realtor.com the changes are small – “The changes are so minuscule that you probably won’t even notice. Typical borrowers won’t see a break in their mortgage rates of more than 0.05 percentage point or a hike of more than 0.07 to 0.1 percentage point. That’s less than rates move in a week.”
So, What’s the Big Deal?
You maybe thinking to yourself why is this news worthy? As the old saying goes, “follow the money”. These changes are political and have caused a stir on both ends of the political spectrum.
On one side you have people upset there aren’t bigger breaks available to people with low down payments and low credit scores. On the other side you have people upset that the program doesn’t allow for more private lenders to enter the market.
So, you’ve got policy makers in this political tug-of-war and borrowers are caught in the middle. This is why its important to understand what is going on and to be informed about how these changes could affect you.
Finally, the FHFA (Federal Housing Financing Agency) decided to change capital requirements on private-mortgage insurance (PMI). This is insurance you must have if you put down less than a 20% down payment on your home. In effect, these PMI companies could end up raising their rates which would then be passed on to you.