May 5, 2023
Feliz Cinco de Mayo!
Ever heard of an LLPA?
Every mortgage is subject to them, whether you knew it, or not. And, they’ve been in the news lately.
They are Loan Level Pricing Adjustments. They are supposed to be risk-based adjustments applicable to any/all lenders’ loans. In the case of Fannie Mae and Freddie Mac loan eligibility, they are pricing adjustments set by the Federal Housing Finance Agency. They are layered on top of a lender’s base pricing, wherever they may be priced within the marketplace. They are uniform across the industry (whereas lenders base pricing is not, and some lenders choose to add additional pricing costs, for certain scenarios, beyond the required LLPAs).
For the most part, LLPAs aren’t something anyone would know about unless you’re involved in the operations or origination side of the mortgage business. Until now.
You may have heard that Fannie Mae and Freddie Mac have just made it more expensive for people with good credit and solid down payments to finance their homes, than for people with marginal credit and smaller down payments. That’s false.
The truth is, they raised costs on some “buckets” based on credit scores and loan to value ratios, and lowered them in others. But, ultimately, if you have higher credit scores and more down payment/equity, you will have access to better rate and fee options than those with lower credit scores, and less down payment/equity.
In January, the Federal Housing Finance Agency (FHFA) who has been Fannie Mae and Freddie Mac’s conservator since the mortgage market meltdown and Great Recession, adjusted the LLPAs that Fannie and Freddie impose upon their borrowers, for loans to be delivered (ie: sold on the secondary market) after May 1.
Since there is a time lag between a borrower looking for a loan (and getting rate/fee estimates), to loan application, to funding/closing, and then the actual delivery of that loan to whomever in the secondary market, lenders imposed those pricing adjustments in February and March. We’ve been living with them for a while.
To illustrate a couple examples of how pricing changed, previously, if you had a 740+ credit score, which was the gold standard, at 80% loan to value ratio, on a purchase or no cash out refinance, you incurred a .5% adjustment to the cost/credit for your loan, on top of whatever the lender’s base pricing was along their spectrum of interest rates.
Now, you would need a 780+ credit score (the new gold standard) to have that same .5% pricing adjustment. If you were a 740-759 credit score, it’s now a 1.125% adjustment, or if you’re 760-779 it’s a .875% adjustment. That incremental cost is then $2500 or $1500, respectively, for the same interest rate, presuming a $400,000 loan, for those credit scores now, vs. prior to the new LLPAs. Or, you could shift up in interest rate by .125% or .25% or so, and absorb the incremental cost. Which, from a payment perspective is roughly $32/mo or $64/mo more, on the same $400k loan.
If you had a 660 credit score, at the same 80% loan to value ratio outlined above, your loan level pricing adjustment used to be 2.75% and it’s now 2.5%. So, on a $400,000 loan, it’s a $1000 improvement.
The biggest changes were for credit scores ranging from 680 to 779, with loan to value ratios between 80% and 95%, making loans more expensive for that cohort. Which, arguably, is the biggest chunk of the borrower pie.
For those with credit scores of 640-659, the biggest improvement was if you had 25% down payment/equity, your loan level pricing adjustment improved by .625%. Or, if you have a credit score between 620 and 639, with only 3% or 5% down, your loan level pricing adjustment improved by 1% or .75%, respectively.
But the one constant is that having better credit, and more down payment (or equity in a refinance) still does, and will always, afford you a better rate and fee structure than having worse credit and less down payment/equity.
They also allowed for waivers of these adjustments for first time homebuyers who are under 100% of the area median income, or 120% of the area median income in High Cost areas.
Now, there’s certainly a conversation to be had about the adjustments that they made, and the impact they will have on borrower costs, lender risk, loss mitigation, and in spurring access to homeownership.
Additionally, all those adjustment examples I outlined are for purchases and rate/term ie: not cash out. refinances. Cash out refinances were also hit with additional costs.
One of the immediate impacts to these incremental costs is that a lot more people, especially when putting less than 20% down to buy a home, or doing a cash-out refinance, will find FHA financing may be a much more competitively priced option than conventional financing.
Because government loans (FHA, USDA, and VA) are designed to expand homeownership opportunities to a broader spectrum of people, their loan level pricing adjustments are much softer, or non-existent, vs conventional financing. On top of that, the FHA monthly mortgage insurance premium was recently cut by .3%, making them much more attractively priced.
Either way, the LLPA changes are a lot more subtle, in my opinion, than those imposed in January of 2022, when the FHFA mandated significant LLPA hits for 2nd homes, or in 2020 when they imposed an across the board “Adverse market refinance fee” on all refinances of an additional .5% cost. Those seem to be more egregious, to me.
For second homes, the pricing used to be the same as primary residences. The only difference was the amount of required down payment, and the fact that government loans (FHA, USDA and VA) were ineligible for second home purchases (which they still are).
As of last year’s LLPA adjustments, second homes now face similar pricing – and in some cases steeper adjustments – than investment properties. It’s anywhere from 2.125% to 3.5% to the cost/credit for a specific interest rate. That’s often as much as about .5% or even .75% higher in rate, for a similar cost loan, for a second home or investment property than for a primary residence (with similar credit score and loan to value ratio).
If the premise is accounting for perceived risk in a loan file, is someone putting 30% down on a second home more likely to default than someone who may have put as little as 3% or 5% down on a primary residence? That’s a debatable question.
As to the FHFA’s short-lived Adverse Market Refinance Fee, which lasted from September 2020 (ahead of loans delivered to Fannie/Freddie from December 1, 2020 forward) that was rescinded by August 2021. They were charging an additional .5% to the cost/credit for any and all refinances. That was a lot of loans, even over just 8 months during which that fee was imposed. Their stated reason was to help offset losses from the pandemic related forbearance plans and loss mitigation efforts.
And lastly, an LLPA had also been imposed for higher debt to income ratios in the January 2023 revision, which was subsequently postponed. This pricing adjustment actually made sense to me. If you’re more leveraged, with a higher debt to income ratio, you may be at greater risk of default. So, it may cost you more to borrow money. This adjustment however, has been postponed, at least until August, for myriad reasons. One of which, is that apparently statistically, although a debt to income ratio (DTI) pricing adjustment may seem to make sense on the surface, DTI is not historically a great indicator of default risk.
It’s an interesting dynamic to balance risk based pricing, while trying to hold a door open more widely for people to access homeownership. Ultimately though, these changes are window dressing compared to the broader question of the cost of housing, and a person or family’s income. I don’t have the answer. But I’ll let you know when I figure it out.
In the meantime, here’s your snapshot of where rates ended this week. Call or email if you, your family or friends have any questions or would like to discuss refinancing, or buying a home. Or the mundane aspects of loan level pricing adjustments. Cheers!
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| Conforming | Rates | Points | APR | Loan Amt | Payment | ||
| 30 yr fixed mortgage | 5.750% | 0.5 | 5.800% | $ 300,000.00 | $ 1,751 | ||
| 15 yr fixed mortgage | 5.000% | 1 | 5.050% | $ 300,000.00 | $ 2,372 | ||
| 5/6 ARM | 6.000% | 0.75 | 6.250% | $ 300,000.00 | $ 1,799 | ||
| 7/6 ARM | 6.000% | 1 | 6.050% | $ 300,000.00 | $ 1,799 | ||
| Jumbo (ask me about Super Conforming limit, per your zip code) | |||||||
| 30 yr fixed mortgage | 6.375% | 0.5 | 6.405% | $ 1,000,000.00 | $ 6,239 | ||
| 15 yr fixed mortgage | 6.500% | 0.5 | 6.530% | $ 1,000,000.00 | $ 8,711 | ||
| 5/6 ARM | 7.375% | 0.5 | 7.405% | $ 1,000,000.00 | $ 6,907 | ||
| 10/6 ARM | 6.125% | 0.5 | 6.155% | $ 1,000,000.00 | $ 6,076 | ||
| Rates subject to change without notice. | |||||||
| Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics (780+ fico, owner occupied SFR with 75% loan to value ratio or less and $200,000+ loan amount), your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. NMLS: 239756. Equal Opportunity Housing Lender. If you’d like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:eric@ezmortgages.us and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject. | |||||||
Eric Grathwol
Broker
EZ Mortgages, Inc.
4535 Missouri Flat Rd. Ste. 2E
Placerville, CA 95667
Office: 530-303-3643
Cell: 916-223-4235
Fax: 530-237-5800
NMLS: 239756
www.ezmortgages.us