The Cost of Doing Business

March 15, 2021

Orion’s staff and our brokers know that loan level price adjustments (LLPAs) and gfee costs are a large part of the cost to the borrower. Any changes, or potential changes, to those items can be just as important to movements in overall interest rates. We continue to work with state and national organizations in an attempt to bring down the cost of a mortgage, but it is not easy. Freddie Mac and Fannie Mae are not in business for their health.


Every loan has loan level price adjustments, or LLPAs. Orion’s AEs take the time to explain these to brokers who must explain them to your clients. But your clients often hear an advertisement for some great rate that is misleading. Depending on the investor there can be hits, or improvements, based on loan-to-value, credit score, type of property, type of transaction, and a few other factors. And the recent public sparring between a few wholesalers has created tumult in the broker channel… Fortunately Orion has steered clear of this.


Fannie Mae announced that it is constricting its 2nd home and investment property lending. On top of that, recall that a while back the FHFA, which oversees Freddie and Fannie, had announced a 10-basis point across-the-board increase in guarantee fees and an increase in upfront fees charged to higher risk borrowers. These increases were put on hold by Mel Watt after he became director of FHFA at the beginning of that year.


But our brokers know that LLPAs currently can be up to 3.25% up front, which can equate to a 50-75 basis point increase in the mortgage rate (on top of private mortgage insurance). And gfees are north of 50 basis points, which at an 8:1buydown ratio can result in a 4-point hit to borrowers.


We’ve seen price hits for cash out refinances. In September of 2020 Fannie Mae and Freddie Mac began charging lenders an additional fifty-basis points (0.50%, or $500 per$100,000) for all refinance transactions. So a $300,000 refinance now costs an additional $1,500 due to this "adverse” market fee.


But where is the adverse market? Forbearance numbers continue to improve in mid-March. But the FHFA has many things that factor into its fee decisions. The appropriate return on capital, whether or not there is a level of gfees or LLPAs that will drive private capital back into the market, the impact of rising fees on overall mortgage volume, and if the fees charge by Fannie and Freddie drive loans to Federal Housing Administration (FHA) programs all jump to mind.


Unfortunately for borrowers, the fee increases and product constrictions have hurt them directly, and regardless of what the bond market does, or base mortgage rates do, the fact remains that the cost of doing business with Fannie and Freddie, has gone up and is not expected to come down any time soon.

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