The Federal National Mortgage Association this week eliminated the fee it charged homeowners who exercise an option, available on some adjustable mortgages, to convert to fixed-rate loans.
The fee was 1 percent of the original principal of a loan held by Fannie Mae. For example, if the outstanding principal was $100,000, the fee was $1,000. Lenders who handle such conversions charge a processing fee that can be as large as $250.
However, the savings from the fee elimination may be more than offset by the higher interest rates on fixed mortgages. Rates charged to borrowers who switch will depend on the movement of interest rates generally, but "a borrower is likely to see a somewhat higher interest rate associated with the decision to convert to a fixed-rate mortgage," said Dennis G. Campbell, Fannie Mae's senior vice president for marketing and product management.
Whether the overall cost of conversion is higher "will depend on how long a borrower holds the loan," he said.
Many mortgage banking companies began offering a more flexible adjustable-rate loan this summer, permitting borrowers to convert to fixed-rate mortgages in any month during the second through fifth years of their loans.
Some older adjustable-rate loans already can be converted, but during a much more limited time, usually for 30 days following the third, fourth and fifth anniversaries of the loan settlement.
Private investment companies do not charge a fee for converting ARMs they own, but because Fannie Mae dominates the market, purchasing more than 20 percent of all mortgages sold, its elimination of the charge will have a far-reaching effect.
Fannie Mae, the largest secondary mortgage market institution in the country, buys mortgages from lenders and sells the loans or securities backed by them to investors. Fannie Mae was chartered by Congress to purchase mortgages as a way to provide more money for home loans.
When interest rates rise, as they have in recent weeks, the demand for adjustable-rate mortgages increases. Buyers who cannot afford high monthly payments turn to adjustable mortgages because the initial rates and monthly payments are lower.
But borrowers generally prefer fixed-rate loans, and many will welcome an ARM that gives them a longer time to wait for a favorable fixed interest before they convert their mortgages.
Fannie Mae announced this week that it also will eliminate some of the fees it charges lenders in other types of transactions, but will initiate different types of charges to offset the income loss.
Commitment fees, which Fannie Mae charges when it agrees to buy loans, will be dropped on Federal Housing Administration and Veterans Administration guaranteed mortgages, second mortgages, some adjustable rate loans and a few others, the agency said.
Instead of charging fees, Fannie Mae will increase the yield, or the interest earned, it requires on loans it buys.
Lenders will be able to choose between a fee or paying higher yields when selling conventional 15-year and 30-year fixed rate mortgages, Campbell said. Most are expected to drop the fees because they believe a fee inhibits business, Campbell said.
The result for borrowers "probably will be a wash," according to Robert O'Toole of the Mortgage Bankers Association of America.
Lenders will pass on the cost of Fannie Mae's new charges just as they passed on the fees, he said