According to a Bank Rate Monitor annual survey, the typical homeowner with a $200,000 mortgage amount in 2006 could expect to pay $3,024 in closing costs. Well, in the early part of 2008, Fannie Mae and Freddie Mac, the two quasi-government organizations that back conforming mortgages in the United States, will institute a new, risk-based fee structure that will cost borrowers an extra .25%, and that’s with great credit.

Higher Closing Costs

The new fee structure, according to Bank Rate, is meant to “compensate for risks inherent in guaranteeing mortgages in an era when house prices are declining, delinquencies are rising, and mortgage investors are losing money.”¹ Only borrowers with loan amounts below $417,000 – the conforming loan size limit – will be affected by the new fees, which will, at the very minimum, amount to an extra .25% cost; this will lead to an extra $500 on a $200,000 loan amount and an extra $1,043 on a maximum conforming loan amount of $417,000. This .25% fee is called an “adverse market delivery fee” by Fannie Mae, and a “market condition delivery fee” by Freddie Mac.

Risk-Based Mortgage Fee Structure

The risk-based model comes into play with larger costs for borrowers with credit scores below 680 or loan amounts greater than 70% of the homes value. In the past, lower credit scores necessarily lead to higher mortgage costs, but the new fee structure will be in addition to the closing costs borrowers have paid in the past.

The new fees will really come into full effect after February of 2008. The risk-based fees that take credit and LTV into account are in addition to the flat .25% delivery fee mentioned above. Freddie Mac is calling its risk-based fee an “Indicator Score / Loan to Value” fee. Whatever the name, it means homeowners can expect to pay quite a bit more in fees with not-so-perfect credit or high LTV.

Here’s a chart outlining the structure of the Freddie Mac fees. As you can see the fees vary at different credit scores and different LTVs. In case you’re unfamiliar with the term LTV, it’s the percentage of the home’s value that is tied up in the mortgage. For example, if you have a $200,000 loan amount on a home valued at $400,000, the LTV is 50%. You can read more about LTV and other terms in our mortgage glossary.

Indicator Score / Loan to Value Fee²
[click to enlarge]

Click the above chart to enlarge if it’s too small to read. That chart is from Freddie Mac, but Fannie Mae has a very similar structure.

Are The New Fees Gouging Homeowners In Their Time of Need?

Some mortgage professionals have complained that, with the recent mortgage market decline, Fannie and Freddie have lost a lot of their competition and are now free to charge higher fees, leaving brokers and banks with no choice in the matter. A large contributor to the current real estate and mortgage market conditions was the fact that money to borrow was cheap and guidelines were loose in recent years. Although Fannie and Freddie are backed by the U.S. government, they did take substantial losses over the past year and the new fees are more about bringing mortgage costs more in line with the realities of risk in this market than they are about gouging the public.

Sources:
1. Bankrate.com – New Fannie, Freddie Fees Boost Mortgage Costs.
2. Allregs.com – Exhibit 19: Postsettlement Delivery Fees

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