April 25, 2023
If you’ve been in the mortgage business for more than 5 minutes, you know to expect constant change. Interest rates, prices, inventory, buyers, regulations, and products are edited and revised at lightning speed.
Knowing about changes gives mortgage pros a chance to fully understand their details and what they mean for their business. That way, you can agilely adapt to, and even take advantage of them.
Fannie Mae’s and Freddie Mac’s May 1, 2023, loan level price adjustment (LLPA) change is a good example.
What Are LLPAs?
LLPAs use features like consumer credit scores, the size of the down payment, and loan-to-value ratios to determine upfront fees. It’s also known as a risk-based fee.
Historically, the “safer” a borrower seems-meaning the higher their credit score, the lower the property’s loan-to-value ratio, and the larger the down payment, the lower their fees. LLPAs can significantly change a borrower’s interest rate and monthly mortgage payment. Over time, LLPAs can greatly impact how much they end up paying for a home.
Since Fannie and Freddie have a 60% share of the new mortgage market, this change affects a large portion of the industry.
What Is the May LLPA Change All About?
The changes are effective for all whole loans purchased on or after May 1, 2023, and for loans delivered into mortgage-backed securities with issue dates on or after May 1, 2023.
Borrowers who possess a positive credit history and credit scores (740 or higher) may see their fee percentage increase slightly from what it was before, while borrowers with fair credit or lower (679 or below) will see their fees decrease from what they would have been before.
When calculated into the life of the mortgage loan, these changes amount to slightly higher payments for borrowers with excellent credit and lower payments for those with less-than-good credit.
This change affects both purchase loans and cash-out refinances.
Why Are Fannie and Freddie Making the Change?
This change stems from an initiative by the U.S. Federal Housing Financing Agency (FHFA) to improve housing affordability for first-time and low-income borrowers and buyers in underserved communities.
The change’s goal is to make homeownership a viable option for consumers who may have been unable to qualify for a loan or afford a mortgage payment before. Fannie and Freddie have a mission (bound by their charters) to do what they can to increase access to affordable home loans.
Is the LLPA Change Good or Bad?
As we unpack the May LLPA change, there are both positive and negative aspects of it, depending on your viewpoint.
Positive things about the change
The main reason for the LLPA is to help otherwise struggling homebuyers afford a mortgage loan. The LLPA decreases the fees such a borrower may have to pay to get into a loan. This discount may make the difference in whether the buyer becomes a homeowner or not. Since it results in smaller monthly payments, the change is also beneficial for borrowers with tight budgets.
Potentially negative things about the change
There are almost always two sides to every story and the same can be said about this change. A negatively perceived aspect concerns buyers with high credit scores. With this change, borrowers with excellent credit get “penalized”. Building credit takes years of paying bills on time and managing debt wisely. Buyers who have accomplished this only to have their fees increased to cover borrowers who haven’t made as much of an effort is frustrating.
How Will This Affect Your Business?
As with any change in the industry, mortgage professionals need to be prepared for how it impacts their business. By proactively understanding the LLPA change, you can plan your strategy.
Whatever your personal stance on Fannie and Freddie’s LLPA changes, we can all agree that it will make ripples in the mortgage industry. By ensuring you understand how it works and what it entails, you can better answer your borrower’s questions as they arise. You may also be able to get some business out of folks who’ve didn’t think they could qualify or afford a home before.