Or, call me at: Fannie Mae increased loan level price adjustments, or LLPAs, for a variety of mortgage scenarios at the beginning of the month, which means many mortgage borrowers with little equity and middle-of-the-road credit scores will likely see higher interest rates. LLPAs work like fees that are charged as a percentage of loan amount for a variety of risk factors, including credit score, loan-to-value, subordinate financing, etc.
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To see how LLPAs work, let’s look at an example of two borrowers with different credit situations. Borrower #1 wants to refinance his existing loan and has a 700 credit score and a mortgage balance equal to 95% of the value of his house. Borrower #2 also wants to refinance, but he has a 780 credit score and only owes 70% of the value of his house. Because of the lower credit score and higher loan-to-value, Borrower #1 gets dinged with an LLPA of .50%, which equals ½ of one percent of the loan amount. Borrower #2 has more equity and a higher credit score, so he is not subject to an LLPA for the combined risk of his credit score and equity. Assuming all other qualifying factors are the same, Borrower #1 will have to either pay an extra ½ point (.50%) in closing costs to get the same rate as Borrower #2 or take a slightly higher interest rate to cover the LLPA hit.
In other words, if Borrower #2 is quoted a 4.875% 30-year fixed with no points, Borrower #1’s quote for a 30-year fixed will be 4.875% with ½ point. If Borrower #1 prefers not to pay the extra ½ point in closing costs, he has the option of taking a slightly higher rate to cover the LLPA hit.
Based on what changed, it appears that Fannie Mae targeted borrowers with credit scores between the low 600s and low 700s with limited equity in their property. For instance, for borrowers with credit scores in the 600s and 20% equity or less, Fannie increased the hits by pretty much an across-the-board .25%.
Because lenders tend to wrap the LLPA hits into their rates, borrowers subject to the increases likely won’t be charged more fees for their loans, but they will pay higher rates.
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