In the past two years, there is a new acronym and it means more to your mortgage rate than any other factor. 

We’ve been talking about these LLPA’s since they were first introduced by Fannie and Freddie back in 2008.  

• Why they happened:  They are a logical response to charge more money up-front for the loans that are most likely to default
• Who they target:  Borrowers with higher risk in their loan scenario

These are mandatory fees designed to better align the mortgage rate and fee with the loan characteristics. 

Today’s loan-level pricing adjustments have five major categories.   A loan application can trigger some or all of these fees and they result in a higher mortgage rate, more up-front fees, or both.  The categories are:

1. FICO:  A 720 FICO is better than a 620 FICO, the 720 FICO gets a better rate
2. Property:  A single-family home has less risk than a 4-unit and therefore gets a better rate
3. Occupancy:  An owner-occupied home has less risk than an investment, thus it gets a better rate
4. Structure:  The presence of a second mortgage is more risky than a loan without a second mortgage
5. Equity:  There is no such thing as a strategic default.  It was an “I don’t have equity” default.  Less equity = more risk = worse rate

This is no different than how auto-insurance is priced.  ABS brakes are safer than non-ABS brakes, thus the insurance rate would change.  Anti-theft systems prevent theft, thus a lower rate.   Drivers with great records (like a driver’s FICO) are lower risk, thus a lower insurance premium. 

The same is true for mortgages. 

Loan-level pricing adjustments are publicly posted.  The complete LLPA matrix is on Fannie’s website.   A good loan officer can help you read it, a great loan officer can help you adjust your loan particulars to achieve the best rate.  If you need help on any one item, hit the live chat button or contact us for questions.

Loan-level pricing adjustments are mandatory loan fees based on a borrower’s specific default risk.

First introduced in 2008, LLPAs were Fannie Mae’s and Freddie Mac’s logical response to massive balance sheet losses. At the time, the housing market was deteriorating and mortgage delinquencies were rising.

To “better align with loan risk characteristics”, the two entities created specific fees to be associated to specific loan traits, to be charged to all borrowers.

LLPAs are still in existence today.

Today’s loan-level pricing adjustments can be grouped into 5 basic categories. Application exhibiting any of the 5 traits can trigger LLPAs, adding to a borrower’s loan fees:

1. Credit Score (i.e. the borrower’s FICO is below 740)
2. Property Type (i.e. the subject property is multi-unit)
3. Occupancy (i.e. the subject property is an investment home)
4. Structure (i.e. there is a subordinate/junior lien on title)
5. Equity (i.e. mortgage insurance is required by the lender)

In many respects, loan-level pricing adjustment are similar to auto insurance. All things equal, the driver of a “fast” car will pay higher costs than the driver of a “safe” car.  The same is true for mortgages.

Loan-level pricing adjustments are public information. Fannie Mae publishes the complete LLPA matrix on its website. The chart can be confusing, however. If you have questions about how LLPAs work, talk with your loan officer.

1. The home is sold for less than the mortgage balance
2. The mortgage company agrees to release title for less than what is owed to them

If someone owes $100,000 and gets a contract for $99,000, that is not necessarily a short sale.  The seller may certainly choose to pay their lender the additional $1,000 and no permission is needed if the bank is made whole at closing.

It is only when the seller wishes to accept a price below what is owed and cannot fund the difference that it becomes a short sale.  And at that point, the contract just added a third-party and became that much more complicated.

Instead of simply the offer-to-acceptance path of a traditional purchase, there is a third-party, the lender.  Even if buyer and seller can agree, the bank will need to evaluate its options and this can be slow.  The bank may prefer to let the home go to foreclosure or they may prefer to counter-offer.   There is simply no way to predict how long a short sale offer will take.

Short sales are moderately preferable to an executed foreclosure.  The seller still is penalized on their credit, the bank still takes a loss, and the current Fannie Mae guidelines prevent that short seller from obtaining new financing for 2 years.