Have you looked at the changes that Fannie Mae made to pricing, as probably directed by their regulator? If not, you need to be sitting down. The mortgage industry is hopping mad about this. The loan level pricing adjustments (LLPAs) are going up and going up a lot. Take a look at the chart below. This chart compares the current LLPAs against the ones that go into effect in April 2014.
Remember these are loan level pricing adjustments so 0.25% on a $100,000 loan equates to $250. So for borrowers who are in the 680 to 759 range and who have less than 20% down, they are going up 75, 100, 125, or 150 basis points.
And for borrowers with credit scores above 760, they will experience LLPA jumps of 50 to 75 basis points.
Now it’s been awhile since I looked at a FICO odds chart, but I seem to recall that anything above 760 was a pretty darn good score with little chance of default. So what’s the deal?
The deal is that the FHFA, under outgoing Interim Director Edward DeMarco, wants private capital to come into the mortgage market. FHFA has been slowly raising the upfront G-Fee in an attempt, albeit unsuccessful attempt, to do so.
And since that didn’t work apparently Mr. DeMarco wanted to leave FHFA with a Shock and Awe campaign. These changes are not about Fannie and Freddie under-estimating the credit risk with these loans. They are about raising the return on mortgages to a level where they believe private capital will come back into the mortgage market.
Well they’re wrong. Until Congress decides on what they are going to do with Fannie and Freddie, I doubt many private capital firms will put their money at risk.
And here’s where the true cost comes. Due to the decree of the CFPB rule makers, loan level pricing adjustments are counted towards the 3% points and fees rule that determines whether a loan is a qualified mortgage. And guess what, Fannie and Freddie won’t buy a non-QM loan. So if you are a borrower with a 700 credit score and a 90% LTV, your LLPA will be 2.25%! I doubt that loan will qualify for QM once the other fees are added. So that means the borrower needs to hope they’ve chosen a portfolio lender with little interest rate risk or they’re going to get a denial letter. And how the heck is that memberlicious for anyone?
Footnote: Yes, I know a lender can convert an LLPA to interest rate, but a 2.25% LLPA is about 3/4% in rate so now we end up with a potential high price mortgage loan issue. FUN, FUN, FUN.