Even with great credit and big down payment, home loans will cost more in 2011

Saturday, January 8, 2011; 12:00 PM

Here's mortgage giant Fannie Mae's sobering New Year's greeting for home buyers and refinancers in 2011: Give me more money. If you want a loan this year, you're going to have to pay more - thousands of dollars more in some cases - even if you have stellar credit scores and bundles of cash handy for a down payment. Things could get much worse if your scores have been sagging with the economy and you don't have much money up front.

In a Dec. 23 memo to lenders in its network, Fannie announced that it has decided to impose a new schedule of higher add-on fees, similar to what Freddie Mac, the other huge congressionally chartered mortgage investor, rolled out to jeers from the real estate industry just before Thanksgiving.

Both corporations have required massive federal financial infusions, estimated at close to $150 billion, since the housing market began deteriorating, and they now operate under a federal "conservatorship" arrangement. The Obama administration plans to submit long-promised proposals to Congress this month on what to do with the two - phase them out, restructure them, privatize one or both of them, or implement other solutions.

Meanwhile, Fannie and Freddie continue to fund or guarantee upward of two-thirds of new mortgage originations. Because of their sheer size and market dominance, they play pivotal roles in determining whether and how fast the housing market can rebound.

Their new fees, set to start this spring, don't appear likely to make financing a home any easier. In fact, some potential buyers who have high credit scores and hefty down payments may be surprised that even they are being targeted for higher "risk-based" fees.

Consider these examples of how Fannie's revised list of loan add-ons will affect borrowers. Say you want to buy a house that requires a $300,000 first mortgage. You have impressive FICO scores above 800 and just under 25 percent cash for a down payment.

Purely on the basis of your credit score and loan-to-value (LTV) ratio, Fannie now plans to charge an extra quarter of a percentage point of the loan amount, in this example $750. In 2010, by contrast, your substantial down payment combined with your FICO score signifying virtually no risk of default would have cost you zero.

Now take the same loan amount, but substitute a lower score and smaller down payment. Say your FICO score is 679 and you have a down payment of just under 20 percent. Fannie will soon begin charging you 2 3/4 percent in add-on fees - a staggering $8,250 extra solely attributable to your FICO score and LTV ratio. That's up by $1,500 over what you would have paid in 2010.

These fees are just the start of the multilayered, cumulative risk-based pricing system that Fannie and Freddie employ. Every perceived risk factor in a loan transaction receives its own separate add-on fee, all of which gets totaled up for your final loan charges. Some fees are keyed to the type of real estate you want to finance. Condos, for example, are charged higher fees than standalone houses - a flat three-quarters of 1 percent by Fannie when the down payment is less than 25 percent. Rental investment properties, manufactured homes and loans with interest-only payment features all get separate fees that can mean significantly higher costs.

That's not all. Fannie and Freddie also tack onto all loans what they call adverse-market fees of one-quarter of 1 percent - the equivalent of cover charges at a nightclub - just to get you seated at the table. In the $300,000 example above, that's a standard admission ticket of $750, not what you'd call chump change. All the fees can be paid up front as part of the transaction costs or financed with a higher interest rate on the mortgage itself.

What's the justification for these add-ons? Although Fannie Mae officials declined to comment on the latest fee hikes, Edward J. DeMarco, acting director of the agency that oversees Fannie and Freddie, called the add-ons "necessary to protect [the companies] from the costs and risks" inherent in the mortgages they buy or guarantee. Fannie and Freddie "underpriced mortgage credit risk" in the boom years, he said in a letter to Capitol Hill critics.

The implication here for borrowers in 2011: It's payback time, folks. Get ready to do precisely that - whether the add-ons hamper a housing recovery or not.


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