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New Fees on Refinances Might Impact Mortgage Servicers

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Business disruptions due to the coronavirus-affected market have taken a toll on the performance of mortgage servicers as well. Despite historically low mortgage rates, rising unemployment levels and an increase in delinquencies kept the environment quite challenging for servicers.

Mortgage lenders benefitted as mortgage rates hit new all-time lows, making prospective home-buyers come out of the lockdown and enter the housing market again in order to take advantage of the low rates. This led to an upsurge in origination volumes as well as refinancing activities.

However, mortgage servicers had to bear the brunt of the pandemic-related slowdown. The first half of 2020 witnessed a rise in the delinquency rate for mortgage loans. Costs for servicing delinquent and foreclosure loans are comparatively higher and the loans generally require servicers to finance advances of principal and interest payments to investors holding these loans, thereby, leading to a liquidity crunch.

Also, the Coronavirus Aid, Relief, and Economic Security or CARES Act passed this March, with a view to support borrowers amid the pandemic fears, has impacted the businesses of servicers. Under the act, borrowers with federally-backed loans may request temporary payment forbearance, which led to a large increase in delinquencies.

Furthermore, in a recent blow to the servicers, Fannie Mae (FNMA - Free Report) and Freddie Mac (FMCC - Free Report) , the government-sponsored enterprises that back millions of mortgages in the United States, have announced that starting from Sep 1, all mortgage lenders will have to pay 0.5% for every refinance loan made to consumers.

This new charge — New Adverse Market Refinance — will be applicable for mortgage refinancing only and not for originations,with an aim to maintain home sales. However, the fees are most likely to be passed on to the borrowers in the form of a higher quote for every refinance loan or the mortgage rate will be increased, thereby, increasing interest costs per year.

This is likely to discourage consumers from refinancing loans, by making them ponder on the excess of benefit from low rates over the higher cost of borrowing.

Post the news of fees hitting the markets last week, shares of mortgage servicers, including PennyMac Financial Services (PFSI - Free Report) , Walker & Dunlop (WD - Free Report) and Mr. Cooper Group (COOP - Free Report) , declined 8.4%, 5.5% and 9.5%, respectively, over the past seven days.

Hence, with an expectation of a decline in refinancing activities, mortgage revenues for banks and servicers with considerable exposure toward the mortgage business will likely be adversely impacted.

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