What the LLPA?#@^&% - What You Need to Know About Loan-Level Pricing Adjustments and Credit Scores
The new Loan-Level Pricing Adjustment, marketed as a measure to support equitable and sustainable access to homeownership, has generated considerable attention and discussion within the mortgage industry.
Its main objective, as put forward by Fannie Mae and Freddie Mac, is to address disparities in mortgage interest rates based on credit scores. However, the bill has raised concerns among individuals who have maintained good credit scores and financial discipline while aiming to purchase a home. In this blog, I will delve into the LLPA, and its potential impact on conventional loans, and explore alternative solutions for borrowers seeking fair mortgage terms.
Understanding the Mortgage Landscape: Before delving into the newest change, it is important to comprehend the current mortgage landscape in the United States. Fannie Mae and Freddie Mac, the two government-sponsored enterprises, collectively control 70% of all US loans, which are commonly referred to as conventional loans. The remaining 30% comprises government loans such as FHA, VA, USDA, Non-QM (portfolio loans), and other specialized programs like Home Ready and Home Possible.
The Intent of the FNMA Bill: The FNMA bill aims to address the disparities in mortgage interest rates based on credit scores, with a goal of supporting equitable access to homeownership. The bill has been likened to the actions of Robin Hood, as it takes from the rich (borrowers with good credit scores) and gives to the poor (borrowers with lower credit scores). While the intentions behind the bill may be noble, it raises concerns about penalizing responsible borrowers who have diligently maintained good credit.
Impact on Borrowers: Under the loan-level pricing adjustment
, a scenario emerges where a borrower with a credit score of 700-760, making a 20% down payment, would face an interest rate that is 3/8% higher than someone with a credit score of 660, also making a 20% down payment. This means that borrowers with higher credit scores would end up paying more in interest, while those with lower credit scores would benefit from reduced rates. This shift challenges the long-standing principle of rewarding responsible financial behavior with lower interest rates.
Exploring Alternative Solutions: Thankfully, there are alternative ways for borrowers to navigate the mortgage landscape without being penalized by the LLPA. Working with a knowledgeable lender who can adapt the loan structure to fit the borrower's unique circumstances can make a significant difference. For example, instead of making a 20% down payment, the lender may suggest putting as little as 5% down, requiring the borrower to pay private mortgage insurance (PMI). While PMI ensures loan repayment, it opens up the opportunity for a recast and re-amortization after obtaining the loan, which can lead to a better interest rate. The recast and re-amortization process typically incurs a cost of around $300 but can provide substantial long-term benefits for borrowers.
Ongoing Discussions and Future Outlook: It is worth noting that the LLPA has already sparked dissatisfaction among many individuals within the industry. As a result, there is an existing bill bringing Fannie Mae and Freddie Mac to sub-committees where discussions will take place to evaluate the efficacy of the proposed legislation. These discussions aim to address the concerns of borrowers who have responsibly managed their finances and credit while seeking homeownership.
The LLPA, intended to promote equitable access to homeownership, has raised questions about the treatment of borrowers with good credit scores. While the change redistributes mortgage interest rates based on credit scores, it may inadvertently penalize individuals who have demonstrated financial responsibility. However, borrowers can explore alternative solutions, such as adjusting the down payment and utilizing recasting and re-amortization techniques, to avoid being disadvantaged.
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