RTC Mortgage Blog

Not Everyone Gets the Same Rate

April 17th, 2010 9:27 AM by Richard T. Cirelli

How Loan-Level Pricing Adjustments May Keep You From Getting The Lowest Advertised Mortgage Rates

If you've ever wondered why the "advertised rate" may have seemed better than the rate that you or your clients got, it's because of a government mandate called Loan-Level Pricing Adjustments (LLPA's).

LLPA's are changes in loan costs based on personal risk traits. Fannie Mae and Freddie Mac first introduced loan-level pricing adjustments in April 2009 and they've been a cause of confusion among borrowers since. Loan-level pricing adjustments tend to surprise people and they can raise an applicant's mortgage rate by a full percentage point or more.

How Are LLPAs Determined?

Simply said, -- not everyone gets the same rate -- the more the risk, the higher the rate. And, many borrowers do get the best rate.

A few of the most common risk factors that can change a person's mortgage rate include:

  • Loan amount more than $417,000
  • Condo's with less than 25% equity or down payment
  • A credit score of less than 740
  • 2, 3-or 4-unit homes
  • Using a home as an investment property
  • Cash-Out" refinance with less than 40% equity in the home
  • Having a second mortgage to subordinate

There are many other factors that affect rate too - such as the length of time a rate is locked in - 15, 30, 45, 60 days.

Each of these traits -- historically -- increases the likelihood of your default.    Therefore, to hedge, Fannie Mae and Freddie Mac charge one-time, pre-set fees to offset a potential future loss.

LLPAs Are Not Discretionary Fees

LLPA's are not discretionary fees; sources of profit or padding.  Nor are they junk fees.  LLPA's are mandatory costs triggered by specific loan characteristics.  There's no flexibility either.  If your circumstances trigger the guidelines, you pay the fees. The amount applies to everyone and every lender.

The Fannie Mae Loan-Level Pricing Adjustment chart is as thorough as it is punitive but at least borrowers get to choose how they pay them:

  1. LLPAs can be paid as a traditional "closing cost", due at closing.
  2. LLPAs can be built into an interest rate. In general, interest rates increase 0.250% for each 1 percent of loan-level pricing adjustment.

The bottom line is that if you read a mortgage quote on a website or newspaper, its likely to be a lenders "best" rate but not necessarily the rate you will get. The only way to get an "accurate" quote is to deal with a mortgage broker that you can trust and to provide enough information for that broker to properly account for any LLPA's that might apply to your particular situation.

Click this link to read more about LLPA's on my website.


Mortgage Rate Update:

It's all about volatility now that the Fed is no longer buying Fannie Mae and Freddie Mac Mortgage-Backed Securities (MBS's). I recently found a source that tracks the volatility of mortgage rates and here's what I found:

In January, mortgage rates changed every 6 hours on average.  Since late-March, however, they've changed every 3 hours. That's two times as fast.  There's no "calling you back in the afternoon" or "thinking about it overnight" in a market like this.  If you are satisfied with you were just quoted you better lock it right now.

The pace of change in April is just the beginning. I predict that it will become even more volatile as the years wears on.

How Can You Be Protected From Rapid Increases in Rates?

It all starts with trust. If you are working with a mortgage broker that you trust - he will be looking out for your best interests. I personally subscribe to 3 different services that alert me to intra-day changes in the price of MBS's or mortgage bonds. They will advise me when to lock or when to float. Some days I get alerts in both directions in the same day. In a fast-paced market there's no guarantee's but a good mortgage broker should be working in the borrowers best interest to obtain the best combination of rate and points possible. And, its also important that the mortgage broker trusts the borrower not to continue to shop with other lenders. Trust is a two-way street.

Posted in:General
Posted by Richard T. Cirelli on April 17th, 2010 9:27 AM



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