Ok, last blog about the recent changes to LLPAs (loan level pricing adjustments)- I hope. But in the spirit of working to force FHFA to get it right, I'm finding it necessary to highlight the topic again.
A LOT of people believe that the May 1 LLPA changes were cancelled, abandoned, or pulled back. They, in fact, were not.
The adjustments to conventional loan financing on all conventional loans delivered to Fannie Mae & Freddie Mac (82% of the financed home purchase market nationwide!) as of May 1 are still in effect. The chart below is reflective of pricing adjustments that are live as of today.
And yes, this means that loans were made more expensive for borrowers with great credit and a good down payment (the largest negative adjustments were to the 720-759 FICO score borrower with between 15-20% down). While overall, when getting a conventional loan, having good credit is still cheaper than the alternative, conventional loans were made more expensive to lower risk borrowers.
Why the confusion?
At the time these LLPA adjustments were announced by FHFA, it was also announced that an additional pricing adjustment was going to be implemented - one based on a borrowers debt-to-income ratio (DTI). So if a borrower used more than 40% of their gross income each month to pay their bills, they'd see higher rates or fees on their mortgage. This was problematic for many reasons. This (and only this) part of the original FHFA announcement was pushed back to August, then due to industry pushback, was cancelled altogether.
With the DTI adjustment being cancelled, and being part of the original FHFA announcement, many people mistakenly believe that the LLPA adjustments were also cancelled - they were not. A consumer buying a house with conventional financing and a loan amount of $400,000 is being charged $3,000 more today than they were in the beginning of the year if they have a FICO score between 720-759 and are putting 15-19.99% down.
Why does this matter?
The pricing adjustment due to DTI was cancelled because of outrage and pushback. But with people believing the LLPA pricing changes were also cancelled, many have gone silent on the fact that FHFA (an unelected bureaucracy only in existence thanks to taxpayer bailout) made conventional financing substantially more expensive for borrowers with excellent credit and higher down payments - basically the lowest risk customers in their portfolio. At the same time, they reduced the cost for borrowers with lower FICOs and less money down - a riskier group of loans.
This action flies in the face of sound lending, where cost is based on risk. It also sets a terribly dangerous precedent, where unelected bureaucrats can raise costs to fund everchanging social equity goals. If it's allowed to stand this once, you can all but rest assured it won't be the last time it happens.
Americans are struggling with high interest rates and record high home prices, and FHFA provided a further gut punch with these pricing increases, charging excessive fees to their customers with the lowest risk of default.
It's not right. It should not stand. But it will, unless people continue to be vocal, contact their representatives, and take a stand for affordable housing with borrowing based on risk. And if you're in the mortgage or real estate industry, PAY ATTENTION. Stop reading headlines and making assumptions. Worst of all, STOP SPREADING FAKE NEWS. LLPA pricing adjustments are still in place, and aren't going anywhere unless we continue to fight them as a group.
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