Adverse Fees Are Bad News For Consumers: Two Alternatives For The Lending Industry

CEO of States Title, the family of companies using technology to make the residential real estate closing experience instant and affordable.

Fannie Mae and Freddie Mac recently announced that they would charge lenders an “adverse market refinance fee” on refinancing loans with an original principal amount above $125,000. This fee goes into effect on December 1, 2020, and will drive up the cost of refinancing for borrowers. At a time when consumers are leveraging lower interest rates to save money, they are being asked to pay more for the privilege. This announcement is symptomatic of a more significant issue in the real estate industry: how we price services.

The adverse market refinance fee is reportedly in response to the coronavirus pandemic’s effects on the market. But is the fee protecting these government-sponsored enterprises (GSEs) against a new risk? Covid-19 is a new type of crisis, but it is not the first crisis the market has ever faced. Economic turbulence happens for several reasons, and businesses have always had to safeguard to ensure that they can survive the peaks and valleys. 

Our industry has a long history of confusing fees, and it has contributed to the closing transaction being one of the biggest pain points for consumers. Homebuyers find the process “painful and overwhelming.” Title insurance, for instance — my professional field— is opaque. When I closed on my first house, I asked many questions about title insurance. The more answers I got, the less I understood the rationale for it, and the more uncomfortable I felt about its value. When you purchase a home and the previous owner also had title insurance, it would seem logical that your fees would be lower because the risk is lower, but that is not true. Rates are based on property value, not risk. 

Historically, the various pricing methodologies for title insurance have resulted in rates going up, not down. This fact will strike many consumers as odd because the risk has not increased. In an area like Southeast Florida, where safer construction materials were needed to withstand natural disasters, an increase in the price of homeowners insurance (which protects the structure of the property) would seem to make logical sense due to the increased rebuilding cost. However, paying a higher premium for residential refinance title insurance on a home that’s been refinanced three times in the last 10 years, where the only change is the property’s value, is not logical. 

The sheer amount of fees and financial information results in complex transactions for consumers. Is the pain necessary, or has it become part of an ingrained ecosystem? I would argue that everyone benefits except the consumer.

The adverse market refinance fee illuminates the inefficiency of the industry. The new fees are being implemented to help the GSEs keep pace with demand. Rather than modernizing the process to improve productivity, the industry charges consumers more for an inefficient workflow. The current process is largely manual and relies on a series of human touch points. Technology can eliminate that inefficiency by reducing human touch points and the potential for errors along with them. In this way, we could solve the underlying problem while increasing profit margins, and there would be no need for consumers to pay more. 

Take Netflix, for example. It is an entertainment company that both produces content and distributes content that has been produced elsewhere. The adverse market fee would be like Netflix charging an extra fee for content that isn’t proprietary to make up for the distribution’s inefficiencies. But, of course, it doesn’t need to do that because it has created efficiency in its own content production, which makes up a significant portion of the total available content. 

For now, it’s clear that the adverse market refinance fee will become a reality. There are two steps the GSEs can take, though, that I believe will better serve consumers and the industry. The first would be for the GSEs to earmark some of the proceeds from the fee to go back to both lenders and consumers in the form of longer-term incentives to provide safe and efficient lending capacity. For those lenders that find ways to more efficiently serve a broader market of borrowers with more affordable long term products, the GSEs could pay back some of the adverse market refinance fee to the loan originator and to the borrower. Over an extended period — one to five years — this would prove that the refinance was the right product for that borrower as demonstrated by no material increase in default/foreclosure rates for those loans versus others. 

The second step would be for the GSEs to establish new technology adoption standards for the mortgage origination process’s core elements. Lenders could demonstrate proof of implementation to reduce the adverse market refinance fee on loans that utilize streamlining technology and qualify the lender for a reduced fee. This reduction would incentivize lenders to embrace modern-day methods that, in turn, speed up their pace of technology adoption. All of this results in better customer experience for the borrower while also significantly increasing the lender’s efficiency.

Bottom line: Now is the time to actively pursue solutions that will make it easier for consumers to conduct real estate transactions. It is time for a new normal that makes sense for the customers we serve.


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