Why some mortgages cost more than others- Pricing adjustments

Why some mortgages cost more than others- Pricing adjustments

Loan-level pricing adjustments are mandatory loan fees based on a borrower’s specific default risk. Not every client we assist is the same as the last or one we will see in the future.

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 score is below 740)

2. Property Type (i.e. property is a multi-unit)

3. Occupancy (i.e. is the property an investment home)

4. Structure (i.e. is there a subordinate/Jr lien)

5. Equity (i.e. Is there mortgage insurance/ down payment amount)

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 thecomplete LLPA matrix on its website. The chart can be confusing, however. If you have questions about how LLPAs work, please call or email me for a free consultation.

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