Menendez bill would bar Fannie, Freddie from charging forbearance fees
Fannie Mae and Freddie Mac would no longer be able to impose a fee on lenders for loans in forbearance under a bill that Sen. Bob Menendez (D-N.J.) plans to introduce Wednesday — potentially benefiting up to a quarter-million borrowers now shut out from getting mortgages.
The $2 trillion economic rescue package Congress passed in March required lenders to give homeowners up to a year’s suspension of their mortgage payments on federally backed loans. In response to the surge in missed payments, Fannie, Freddie and the Federal Housing Administration have started imposing penalties on lenders with loans in forbearance.
Lenders, in turn, have started tightening their underwriting processes to weed out loans that might go into forbearance in order to avoid triggering the fee. That’s made it harder for people with lower credit scores — a group disproportionately composed of Black and Latino homebuyers — to qualify for a mortgage loan.
“This pandemic has caused financial distress on families across the country and has shone a light on the economic disparities that exist,” Menendez said.
“We must ensure that homebuyers facing financial strain are not arbitrarily denied access to mortgage credit throughout this emergency,” he added.
Fannie and Freddie now impose 5 percent fee on loans in forbearance where the borrower is a first-time homebuyer and a 7 percent fee on other loans in forbearance. The FHA requires the mortgage servicer to absorb 20 percent of the eventual loss if a borrower misses two payments on a loan.
Those penalties “will limit homeownership and refinancing opportunities for approximately 255,000 creditworthy borrowers” this year, according to an Urban Institute analysis released Tuesday.
The National Association of Realtors supports the bill, a version of which was introduced in the House in May by Rep. Juan Vargas (D-Calif.)
“We are in the middle of a public health crisis, and no American should needlessly suffer because of this pandemic,” NAR President Vince Malta said. “This bill guarantees that temporary forbearance does not lead to permanent damage to the American economy.”
Fannie and Freddie are normally barred from buying mortgage loans that are delinquent or in forbearance. After Congress required mortgage servicers to offer a pause in payments, Fannie and Freddie’s regulator in April announced the companies would start purchasing loans in forbearance to ease the strain on the mortgage market — but that the loans would be “priced to mitigate the heightened risk of loss to the Enterprises from these loans.”
The Urban Institute analysis found that the maximum income the government stands to collect from the new fees is $53.4 million, a trifling amount compared with the billions of dollars the government-sponsored enterprises bring in. The Trump administration, though, has been preparing to release Fannie and Freddie from government control, a move that would depend on the companies building significant capital.
