Ooooof. Maaaaan, do WE love acronyms in the mortgage business!
Reminds me of a lesson from my ‘Intermediate Finance’ professor in college. He would though out some complicated sounding Term/Acronym. Then say, “What that really means is …………. We just give it a complicated name to keep outsiders out or sound smart.”
In the mortgage business, Acronyms are the NIGHTMARE of spouses and significant others at company events. One of the most misunderstood ones within the business is LLPA.
Loan-Level Pricing Adjustments (LLPA)
A loan-level pricing adjustment (LLPA) is a risk-based fee assessed to mortgage borrowers using a conventional mortgage. Loan-level pricing adjustments vary by borrower, based on loan traits such as loan-to-value (LTV), credit score, loan purpose, occupancy, and number of units in a home. Borrowers often pay LLPAs in the form of higher mortgage rates.
My professor would have said “What that really means is that WE need to adjust the price of loans with different risk to pay for the risk. So someone with high-risk features doesn’t get the same price as someone with low-risk qualifications. And the investors are rewarded for taking on risk”
I’m sure most of you are well aware, there was a pretty radical change to Fannie/Freddie LLPA structure recently. Here is a heat map of the CHANGES in the LLPA grid for conforming loans
Which was basically
This means that the FHFA improved the price hits for lower FICO borrower, particularly those with less down (historically higher risk) borrower. And they made them worse for a bunch of (perceived) higher qualified borrowers (more down, higher FICOs). To a resounding chorus of “Wait, what??!” from the industry.
These changes went into effect on “all loans delivered to Fannie/Freddie after 5/1/23.”. An odd and uniquely specific rule, huh?
When the Agencies make rules, they use a mental framework of “look, there are too many of you to deal with. Gives me a headache. Bottom line is, Hoss, you are gonna wanna deliver your loans to us. So WE are going to set that date according to that. All y’all work the HOWs out amongst yourselves.”
In our world, that means the loan must be locked > processed > UW > Closed > Funded > Delivered > Purchase Conditions Cleared > Bought by that date. One day (hour) late – WHACK. Which is why you typically see these LLPA charges creep in over time leading up to the changes.
The industry said “That’s not fair. You are making loans more expensive for people who earned the right to a better price – to benefit those who didn’t. That’s not fair. What the heck, buckeroo.” The Government’s retort was essentially “Please reference all of our previous statements about historical external factors that can impact financial conditions for many people. And, also, This grid doesn’t mean that people with lower FICO/Downpayment get a better price than people with higher FICOs! That grid is the CHANGE IN hits. Not the hits themselves. People with better qualification will still have lower LLPAs.”
Interestingly, WE live in a universe where both can be true. So they went into effect
Emboldened by this, the FHFA was on a roll so they said, “Hold my Beer.” They devised a plan to add MORE hits to the LLPA grids for borrowers over certain DTI thresholds. The logic being that higher DTI borrowers are more risk, making $3.2B last quarter isn’t enough, gimme-gimme.”
To this the industry said “No! NO!!! Hell naw!!!!!”
Because it was going to be a nightmare. I mean, you won’t know know knowy know know the final DTI (to like 3 decimals) until the very end. The insurance quote could come in high and now you are 43.001% vs 43.000%. Bang – price hit. Resell.
So the industry put its foot down. The Mortgage Bankers Association organized a big campaign to make it easy to email your Congress People. Thank you to all of you who took 1.5 min to do this through the MBA Mortgage Action Alliance. I mmmmight have done it twice. Not sure.
It worked!!!!! They rescinded the ruling and cancelled the DTI-based price hit. Thankfully! Which is another example of why it’s important to stay up to date on mortgage business happenings. This has happed like 3x of the last 3-4 years that WE got dumb ideas overturned.