LET'S STAY CONNECTED!

Loan LevelPrice Adjustments

Regardless of election results or which political party is in power, borrowers are often confused by the press, or the marketing efforts of some lenders, when they see a simple mortgage rate. Orion’s brokers’ clients should know that rates in the headlines or newspapers are inaccurate. This is not only because of bond markets move minute to minute, impacting rates, but also because of loan-level price adjustments (LLPAs). Brokers tell their clients about them because they are the market’s measure of risk for a given borrower.

LLPAs are fees that influence the cost of a mortgage, normally conventional conforming(Freddie Mac and Fannie Mae) but also other products as well. Based on a borrower's risk level, LLPA fees can lower mortgage pricing for low-risk borrowers while raising the cost for higher-risk borrowers… They are based on risk, not on the lender, and were typically derived from analyzing the losses suffered on certain products.

A lender will determine the interest rate and cost of discount points by using an LLPA fee matrix set by Fannie Mae, a credit fee matrix from Freddie Mac, or another matrix produced by an investor. These matrixes primarily consider your client’s loan-to-value ratio and credit score.

Riskier borrowers pay higher rates on LLPA fees than safer borrowers. So, if you have a low-risk borrower with a low loan-to-value (LTV) ratio, and a high credits core, the cost of their mortgage will generally be lower than for a borrower with a high LTV and a low credit score.

If your client is considered a high-risk borrower and want a lower rate, you can get it– but the client will have to pay discount points to do so. In addition, interestingly, if a borrower needs private mortgage insurance because the LTV is above 80 percent, that insurance actually lowers the risk, and the LLPA often goes down!

For a little more detail, brokers should know that LLPA fees are calculated based on mortgage lending risk factors. The higher the credit score, the lower the risk, and the lower your client’s LLPA fee. A higher down payment (which creates a lower LTV) lowers lender risk and, therefore, the LLPA fee. The more debt your client has, the tougher it is to keep up with payments such as their mortgage. Loan purpose: Investment properties or second homes are riskier for lenders than primary homes, so LLPA fees are higher for these loans. Unoccupied properties, like 2^nd homes, require higher LLPA fees.

Recent LLPA matrix revisions by the Federal Housing Finance Agency, which oversees Fannie and Freddie, introduced more favorable terms. But changes to LLPA fees are common due to changes in the perceived risk of the components. Freddie and Fannie are constantly evaluating the losses suffered on certain types of loans.

Brokers are ideally situated to help clients consider their options based on their plans. Brokers and AEs can calculate the LLPA fees and also suggest alternative programs to reduce or eliminate them. If your client plans to refinance, anticipating a rate drop, they might be willing to accept a higher rate with lower up-front costs. But if they plan to keep their mortgage long term, paying points could be a better move. Or they might contribute more of a down payment to get to a better pricing tier. Ask one of our AEs if you have questions!

‍