Menendez Proposal Would Bar Fannie Mae & Freddie Mac From Charging Forbearance Fees

The imposition of fees on lenders for loans in forbearance by Fannie Mae and Freddie Mac would no longer be permitted under legislation introduced by Senator Bob Menendez.

If Menendez’s bill becomes law, it could potentially benefit up to 250,000 borrowers who currently cannot get a mortgage.  The Senator stated, “This pandemic has caused financial distress on families across the country and has shone a light on the economic disparities that exist.  We must ensure that homebuyers facing financial strain are not arbitrarily denied access to mortgage credit throughout this emergency.”

In March, Congress passed a $2 trillion economic rescue package that 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, began issuing penalties on those lenders with loans in forbearance.

What has been the response by lenders?  They’ve started tightening their underwriting processes to sift out loans that might go into forbearance in order to avoid triggering the fee. The result?   It’s harder for people with lower credit scores — a group disproportionately composed of Black and Latino homebuyers — to qualify for a mortgage loan.

A House version of the Menendez legislation was introduced by California Democrat Juan Vargas in May.  The legislation has the support of the National Association of Realtors.

Fannie Mae and Freddie Mac currently impose a 5 percent fee on loans in forbearance, where the borrower is a first-time homebuyer.  They impose a 7 percent fee on other loans in forbearance. The Federal Housing Administration requires the mortgage servicer to absorb 20 percent of the eventual loss, if the borrower misses two payments on a loan.

According to an Urban Institute analysis released Tuesday, those penalties “will limit homeownership and refinancing opportunities for approximately 255,000 creditworthy borrowers” in 2020.


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