Loan Modification

FHA vs. Fannie Mae: Higher Fannie fees make FHA look even better

By Gina Pogol

If you want a conventional conforming mortgage, it’s going to cost you more in 2011 thanks to an “updated” Fannie Mae fee schedule (little brother Freddie Mac already made this move at the end of last year).  The new Loan Level Pricing Adjustment Matrix shows that mortgages may cost even the nearly-flawless borrowers thousands of dollars more for mortgages (to be truly flawless you must pay cash and not require a mortgage at all). Even if you have a halo over your head and bundles of cash for a down payment you will likely pay more. And it gets worse if the recession etc. has done damage to your credit scores and your financial position.

Fannie and Freddie: making their problems your problems

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.

The government-sponsored enterprises (GSEs) have received massive federal cash infusions (about $150 billion)  since the housing market began deteriorating, and they now operate under a federal supervision. The Obama administration plans to submit long-promised proposals to Congress this month on what to do with the two problem children:  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 mortgages. Because of their sheer size and market dominance, their policies drive the state of housing and mortgage financing.

Their new fees go into effect this spring and don’t appear conducive to  making home buying any easier. In fact, some potential buyers with high credit scores and hefty down payments will be unpleasantly surprised when they discover that even they are being targeted for higher “risk-based” fees.

New fees: everyone gets clonked

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 $400,000 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 case $1,000. Last year your ginormous down payment combined with your beautiful credit score would have cost you zero. If you aren’t a fabulous risk then no one is, c’mon….

Those who don’t walk on water will drown in fees

Now take the same loan amount, but substitute a lower score and smaller down payment. Say your credit score is 679 and you have a down payment of just under 20 percent. That nasty girl Fannie will soon begin charging you 2.75% percent in surcharges — a whopping $11,000 because combined, your FICO score and LTV ratio supposedly make you a higher risk. Really?!

But wait, there’s more

If that isn’t enough to chap your hide,  Fannie and Freddie also tack onto all loans what they call adverse-market fees of .250% on all loans. In the $400,000 example above, that’s an extra $1,000 with no added benefit to you. All the fees can be paid up front as part of the transaction costs or your lender can cover them if you pay a higher interest rate.

Just say no to Fannie Mae, do your loan with FHA

So if looking at conventional financing, consider FHA even if you have a good-sized down payment and great credit. The rules have changed, and what would have been a no-brainer decision in the past requires a little more examination today. Look at the cost of FHA’s MIP and mortgage insurance versus the prodigious add-ons with conventional financing. It may pay to choose FHA.

Full post as published by FHA Mortgage Guide on January 10, 2011 (boomark / email).