Tag: Loan Level Price Adjustments

Yes, I Know It’s Confusing, But There Are Some Changes in Loan Rates

Social media has been abuzz lately with rumors about a new “tax” that is targeting high-credit score borrowers. Before you decide to stop paying your bills on time, I asked Jaxzann Riggs, owner of The Mortgage Network to explain as best she can what these changes are about.

She reminded me that we wrote about the shifts that had already begun in home loan pricing several months ago, when FHFA, the federal agency that supervises Fannie Mae (FNMA) and Freddie Mac (FHLMC), announced that changes were on the horizon.

FNMA and FHLMC are charged with providing liquidity, stability, and affordability to mortgage markets. Affordability is the key word here, especially for those borrowers within “underserved communities.” To support this priority, FNMA and FHLMC began changing Loan Level Price Adjustments, also referred to as LLPAs. These are adjustments made to the interest rates offered to borrowers based upon such criteria as credit score, loan-to-value (LTV) ratio, occupancy, property type, and debt-to-income (DTI) ratios.

In recent months, FHFA has announced many targeted changes to FNMA and FHLMC pricing. One example would be that first-time homebuyers who are at or below 100% of area median income (AMI) in most of the United States and below 120% of AMI in high-cost areas such as Denver may be offered rates that are lower than in the past. These changes signal a significant shift in lending philosophy with emphasis placed on those who may be “underserved.”

As an example, at the height of the COVID crisis, the cost of mortgages for second homes and investment properties was identical to that for primary residences. Currently the rate differential between an owner occupied home and an investment property or second home is over a full percentage point, making real estate investing much more expensive than during COVID.

The current change to LLPAs will, in some cases, reduce costs for those with lower credit scores and raise costs for those with higher credit scores, but, as shown in the graphic above from The Mortgage News Daily, the rumors are conflating the changes for the actual cost.  Let’s take a minute to look at that graphic.

The chart shows the changes to the previous LLPAs. The green represents the falling costs; the red represents rising costs. As you can see, there is clearly no scenario where someone with lower credit will have a lower interest rate after adjustments are made.

While the change in LLPAs does result in a tweak of an existing fee structure in favor of those with lower credit scores, you can also see that there are instances where costs have lowered (green) for those with a high credit score. A low credit score borrower isn’t paying less than a high credit score buyer, but the gap between what they pay is simply smaller than it was previously.

According to the Federal Housing Finance Agency, while some fees are being eliminated for lower-income buyers and lower credit score buyers, and fees are being increased for some buyers with higher credit scores, the two are not cause-and effect.

“Higher-credit-score borrowers are not being penalized or charged more so that lower-credit-score borrowers can pay less,” they said in a statement. “Some updated fees are higher, and some are lower, in differing amounts. They do not represent pure decreases for high-risk borrowers or pure increases for low-risk borrowers.”

I know that these topics can be confusing, and rumors can be overwhelming to debunk. If you are shopping for a home loan, Jaxzann would be happy to provide an interest rate quote for you. You can reach her anytime on her cell phone at 303-990-2992.  Tell her you saw this column..

It Pays to Be Aware of Recent FHFA Changes to Lending Rates and Rules

We are barely six weeks into 2023 and already, we are  feeling  the effects of  “pent up demand” for housing. Denver’s real estate market is rebounding and the advantages that buyers had in the last few months are declining as the “Spring Selling Season” unfolds. Consumer confidence, unemployment numbers and inflation have been in the news recently, and while those factors certainly impact the cost of residential home loans, there are other upcoming changes in the industry that aren’t as well known. I asked Jaxzann Riggs, owner of The Mortgage Network, to elaborate.

The Federal Housing Finance Agency (FHFA) has announced changes that will affect the cost of home ownership for many borrowers starting in March.

Established in 2008, FHFA was created to restore confidence in the mortgage market and to provide supervision and regulation over Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. FHFA has made it their mission to prevent a repeat of the housing collapse and promote stability so that Americans can buy homes with confidence, especially those within underserved communities.

FHFA has announced targeted changes to Fannie Mae (FNMA) and Freddie Mac (FHLMC) pricing by eliminating added interest rate adjustments called Loan Level Price Adjustments (LLPAs) for certain borrowers and affordable mortgage products. There are requirements to qualify, but one example would be first-time homebuyers who are at or below 100 percent of the area median income (AMI) in most of the United States and below 120 percent of the AMI in high-cost areas such as Denver.

Traditionally, LLPAs have been added to interest rates to account for higher risks such as lower credit scores, low down payments, and property types, such as condominiums. Eliminating these LLPAs can lower the offered interest rate by up to 1.75%, which makes a substantial difference in a monthly mortgage payment. These changes will help to make home ownership easier for underserved and first-time buyers.

To support FHFA’s priorities, lenders will offer new mortgage programs that allow individuals to make down payments of only 3% and, in an effort  to help first-time and lower-income buyers enter the housing market, a portion of the 3% down payment can actually be borrowed.

While Fannie Mae, Freddie Mac, and FHA are reducing the interest rates being offered to first-time and lower-income buyers, they are increasing the interest rates being charged to other home buyers. We have already seen a dramatic increase in the cost of loans for individuals purchasing a second home or investment property, and additional increases are expected in the next couple of months. These changes signal a significant shift in lending philosophy. At the height of the COVID crisis, the cost of mortgages for second homes and investment properties was identical to that for primary residences.

Currently the price differential between an owner-occupied home and an investment property is over a full percentage point, making real estate investing much more expensive than in recent years.

While credit scores have influenced the cost of money for over a decade, Fannie Mae and Freddie Mac will now increase interest rates for those with mid-level FICO scores. In the past, the percentage of income (debt to income ratio or DTI) that a borrower used for housing had no impact on the cost of the loan. Soon a borrower’s DTI ratio will be factored into the cost of loan — the higher the DTI, the higher the rate.

You may have questions about the changes. Do you qualify? What is the best loan option for your personal circumstances? Reach out to Jaxzann Riggs of The Mortgage Network, 303-990-2992, for answers.