Mortgage Rate Decline Slowed By New Fee Charged By Fannie Mae And Freddie Mac

Interest rates on 30-year mortgages and 10-year Treasury bonds

The interest rate on mortgages has not fallen as much as the interest rate on 10-year Treasury bonds


Mortgage refinance costs swung up due to a new fee, which some are calling a tax. The eventual path to lower rates (which I recently predicted) will be slowed, but not entirely stopped. The announcements by Fannie Mae and Freddie Mac say the lump-sum fee of one-half a percent of the loan balance applies to refinances on single family homes. It does not apply to construction loans converting to permanent loans nor to mortgages for home purchase.

Fannie and Freddie are government-sponsored enterprises, which is a little confusing in itself. They are enterprises, meaning they have profit and loss statements. But they are government-sponsored, so their debt is treated kind-of-like government debt. They can pay lower interest rates than private companies would have to pay. With that advantage, they have near-total control of the market for mortgages that conform to their guidelines.

Interest rates on 30-year mortgages usually run at a steady premium over the interest rates on 10-year Treasury bonds. But early in 2020, the Treasury rate plummeted without mortgage rates following along fully. This wider margin was explored in William Emmons’ article, “Why Haven’t Mortgage Rates Fallen Further.” Most mortgages that conform to Fannie and Freddie’s loan guidelines are bundled in groups and sold as mortgage-backed securities. The process creates two spreads. At the retail level, the interest rate charged to borrowers is higher than the interest rate paid to owners of the mortgage-backed securities. The mortgage originator—a bank or independent mortgage company—pockets the difference to cover their costs and to earn a profit. The second spread is called the wholesale margin: the difference between the interest rate earned on mortgage-backed securities and what government bonds are paying.

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Moon Kil Woong 3 months ago Contributor's comment

Fannie and Freddie previously was not sustainable and most likely will not be in the future. That is why downturns they rely on you, the taxpayer to foot their deficient cash flow. A fee is fine if this remedies this, however, I doubt it will. I also doubt the cost will not remain with the finance company. It will be passed onto you. In the end, this is why the US needs to stop supporting these and allow the market to make a system that remedies the US being the backstop for a private company. After that we can talk about TBTF banks although they got some remedies by making loans they won't hold and dumping them onto Fannie Mae and Freddie Mac.

If you say this doesn't seem capitalistic you would be right. If you say this seems corrupt, you would be correct. If you say this should be stopped, that is what I'm arguing. Yet it persists somewhat because it inflates housing prices which allows the government to tax you more. A unvirtuous circle indeed. This is one major reason why home prices are inflated.