I’m cautiously optimistic we are on a path to recovery in the housing industry following a year of record mortgage rate hikes coupled with a historic low supply of homes for sale. With inflation calming and the numbers for new home starts inching up, affordability remains the persistent challenge. The new pricing structures initiated by the Federal Housing Finance Agency (FHFA) will improve affordability for some, but experts fear their overall impact could slow a full recovery.
Industry banter surrounding recent changes to conventional loan programs through Fannie Mae and Freddie Mac (referred to as the GSEs, Government Sponsored Entities) can offer more confusion than clarity. The changes are impactful across all programs and warrant some explanation and perspective. If you are looking to buy or sell a home or advise those who do, this is for you.
Risk Based Pricing
Following the rather laissez faire approach to home loan qualification resulting in the events of 2008, the FHFA was established to create stability in the mortgage industry. Risk-based pricing adjustments known as Loan Level Price Adjustments (LLPAs) that vary based on credit score, loan-to-value (LTV) ratios, occupancy, and other factors were established and applied to a borrower’s rate during automated underwriting. Initially the fee structure sought to match the borrower with a rate and terms commensurate with their credit risk.
Each year the pricing matrices are reviewed and inevitably change. For 2023, the changes are significant and reach across all categories of borrowers.
The Mortgage Bankers Association is pushing back on full implementation as these fees – some as high as 5.125% in the form of discount points – stand to delay the recovery of the housing industry by driving financing charges higher for a significant tier of well qualified borrowers.
What’s New
In late 2022, the FHFA set a directive to the GSEs to improve access to home ownership across a broader spectrum of borrowers. To that end, pricing will improve for lower FICO score / higher loan to value (LTV) borrowers. The matrix, published here on Fannie Mae’s website, has expanded and restructured impacting borrowers in all tiers. The new grids heavily factor in loan type, loan amount and down payment reflecting an increase in fees for borrowers with solid credit scores in the 680+ category and low LTVs.
No longer are LLPAs strictly connected to risk. The revised structure now funds risk to accommodate this wider category of lower credit score, high LTV borrowers with an increase on fees to well qualified low risk borrowers. It is all but impossible to not incur at least 1 or 2 of these .125% to 5.125% LLPAs with those seeking second homes, investment properties or cash out refinances being awarded some of the highest fees.
The noise surrounding this year’s updates stems from the potential burden these new LLPAs place on low-risk, highly- qualified borrowers already struggling with affordability. The new price structure went into effect May 1, 2023. Now, more than ever before, it is imperative to seek a fully underwritten pre-approval as LLPAs can only be applied during the automated underwriting process. Without an underwritten pre-approval, the total cost of a loan and confirmation of qualification is not a guarantee of final price or qualification.
Nothing Speaks Louder than Numbers
The chart below is a sample of some of the changes and not fully inclusive of all revisions. It is stated in incremental fee change. The orange boxes represent the incremental increase in fee while the green boxes reflect incremental fee decreases.
Across the board, the orange center tier representing the average borrower with a 20% down payment and a credit score between 680 and 780 takes the brunt of the fee hikes on purchase transactions. This is one of a multitude of LLPAs that could apply to the loan fees, paid in discount points at close, as the borrower proceeds through underwriting.
The focus on creating affordability is reflected in the far right column highlighted entirely in green providing low down payment borrowers access to financing, while those with credit scores below 620 and 679 also get some fee relief.
Important Take Aways
- A pre-approval must be fully underwritten to determine the rate and all associated fees for each borrower. All GSE loans go through an automated underwriting process which assigns the LLPAs. No rate can be accurately quoted to any borrower until all factors surrounding the borrower are vetted through this step.
- Jumbo loan products are a potential money saving alternative for well qualified and move-up buyers as they are not associated with the GSEs and therefore not subject to the same mandatory fees.
- First-time home buyer programs are part of the GSE tier that improved with fewer fees and broader guidelines. Work with a lender that offers fully underwritten pre-approvals to avoid unwelcome surprises. Many lenders do not underwrite pre-approvals and wait until the loan is in process before completing this step.
As the complexity builds in structuring financing for a home loan, I encourage buyers to start early and work with an experienced lender who offers fully underwritten pre-approvals to ensure the home buying experience is a positive one.
