Freddie Mac tightens fees on loans

The US second largest provider of funding for home mortgages Freddie Mac plans to lift some fees on loans it finances which shows there are greater risks even for borrowers making regular payments.

In the bulletin released this week the mortgage giant says it will some so-called "delivery fees" in March to cover increased risks on loans covering large portions of a property's value. The fees are charged to lenders, but will likely raise costs on many loans for both purchases and refinancings, including those already funded by Freddie Mac.

Still, Freddie Mac notes that it would have little impact on monthly payments - perhaps less than $10. Meanwhile, analysts predict that the move will further chill refinancings that have already had a tepid response to record low interest rates.

"I fail to understand the logic of this policy when the agencies already own the credit risk, and the borrowers are making payments," said Paul Norris, head of structured bonds at Dwight Asset Management in Burlington, Vermont. "The last thing we need is more people giving up, more strategic defaults, and more delinquent loans."

Freddie Mac spokesman commented that while lower rates make a loan more affordable, they don't always reduce mortgage risk.

The bulletin says that among other things the fees will be risen by 0.25% to 0.75% on mortgages with a combination of high loan-to-value ratios and/or lower credit scores.

Nevertheless, even creditworthy payers would be impacted unless they put 25% down up from 20% that has long been the minimum equity needed to escape the need for mortgage insurance.

"This makes 75 percent the new 80 percent," said Scott Buchta, head of investment strategy at Braver Stern Securities in Chicago, of the maximum loan taken without added fees.

One of the major changes is to account for properties with second liens, the spokesman said. Home equity loans and credit lines boost combined loan-to-value ratios, which when high, have a huge negative impact on loan performance, according to Amherst Securities' strategist Laurie Goodman.