As of May 1st, 2023, Fannie Mae and Freddie Mac have altered their LLPA matrix to make homeownership more attainable to first-time homebuyers and underserved borrowers. While this change was made with good intentions, it has spurred some controversy amongst mortgage professionals.
So, what are the details regarding the LLPA changes? And what do they mean for mortgage lenders? Below, we’ll explain everything you need to know about the recent LLPA update.
What Are LLPAs?
Put simply, LLPAs are adjustments to the price of conventional mortgage loans. Their purpose is to mitigate risk and cultivate more capital for Fannie Mae and Freddie Mac.
Since some loans are riskier than others, Fannie Mae and Freddie Mac base their LLPAs on loans’ degree of risk. Much like auto insurance premiums, riskier loans incur costlier LLPAs. Some risk factors that can influence borrowers’ LLPAs include their:[i]
- Credit score
- Loan-to-value (LTC) ratio
- Property type
- Occupancy type
- Loan term
- Loan amount
- Subordinate financing
Fannie Mae and Freddie Mac put out detailed LLPA matrices so lenders can see how much each of these risk factors will impact their borrowers’ mortgage rates.
The History of LLPAs
After the 2008 housing crisis, Fannie Mae and Freddie Mac needed to secure more capital and reduce their risk exposure.[ii] They introduced LLPAs for conventional mortgages to do just that.
The last iteration of the LLPA matrix was developed a while ago. Thus, this year, the Federal Housing Finance Agency (FHFA) decided to update it to factor in the current lending environment.
FHFA’s 2023 Updates to LLPAs
The FHFA recognizes that purchasing a home is increasingly difficult for first-time homebuyers and underserved borrowers. These applicants often have lower credit scores and fewer financial resources. To help these applicants pursue homeownership, the FHFA has decided to alter the LLPA matrix to make mortgages more affordable.[iii]
The new changes generally reduce costs for borrowers with lower credit scores compared to the old LLPA guideline and increase costs slightly for borrowers with higher credit scores. However, the impact of these changes on individual borrowers is not so cut and dry. For instance, some borrowers with good credit may see slight reductions in their LLPA fees—a borrower with an excellent credit score and a down payment of 5% could enjoy a 0.625-point LLPA reduction.[iv]
Is This Change Good or Bad?
Some claim that borrowers with excellent credit scores are being unfairly penalized by these changes. While creditworthy borrowers won’t receive as much of a benefit as they did before, they’re still at a great advantage when it comes to LLPAs.
Homebuyers with higher credit scores will still pay less than those with lower credit scores—the gap between these groups is simply becoming narrower.
Meanwhile, discounting LLPAs for borrowers with lower credit scores can help homebuyers who couldn’t afford mortgages in the past finally achieve their dreams of homeownership.
Recent Updates Effective May 10, 2023 – Rescission of DTI Based LLPAs
On February 3, 2023, the Mortgage Bankers Association (MBA) joined the LLPA discussion by sending an open letter to the FHFA about the addition of “DTI above 40%” as a risk factor. This letter stated that many MBA members fear it will:
- Increase mortgage costs for borrowers
- Impose operational obstacles on mortgage lenders and underwriters
- Delay loan closings
- Introduce post-closing quality control issues
- Increase the number of income-related repurchase demands from government-sponsored entities (GSEs)
In this letter, the MBA also asserts that DTI isn’t a reliable indicator of borrowers’ ability to repay their loans. After all, borrowers’ income and expenses can fluctuate throughout the loan application and underwriting processes.
Following these efforts, the FHFA delayed the implementation of the DTI LLPA from May 1, 2023 to August 1, 2023.
On Wednesday, May 10, 2023, FHFA announced the rescission of the debt-to-income (DTI) based loan-level pricing adjustment (LLPA) that was included in the recent updates to Fannie Mae’s and Freddie Mac’s pricing grids.
Use The LLPA Changes to Your Advantage
Regardless of your opinions on the LLPA update, it’s important to adjust your mortgage lending strategies accordingly. Most notably, you should start preparing your business for the influx of borrowers with lower credit scores that will now be able to afford your mortgages. By helping these borrowers realize their newfound lending opportunities, you may be able to win over their business when they’re ready to buy.
Next, it’s important to educate your borrowers on this LLPA update. As one of the lesser-known costs involved in the mortgage lending process, you may be the first person to introduce some borrowers to the concept of LLPAs. Make sure that these borrowers understand how the following factors can increase their monthly mortgage expenses:
- Having a credit score below 700
- Purchasing a non-primary-residence property
- Buying a multi-family home
- Buying a condo with less than 25% equity
- Pursuing a cash-out refinance
Since credit scores directly impact LLPAs, you can also coach your borrowers on ways to improve their credit scores. This way, they can have a better shot at qualifying for lower interest rates, better terms, and lower LLPAs. Here at Certified Credit, our credit score improvement tools can provide your borrowers with customized score improvement plans.
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[i] Fannie Mae. Loan-Level Price Adjustment Matrix.
[ii] The Mortgage Reports. Loan-Level Pricing Adjustments (LLPA).
[iii] HousingWire. FHFA Director Thompson speaks out to correct LLPA misinformation.
[iv]CBS News. Mortgage fee structure for some homebuyers is changing this month. Here’s how.