Starting May 1, upfront fees for loans backed by Fannie Mae and Freddie Mac will see changes in the Loan Level Price Adjustments (LLPAs). This revision has prompted misleading and often incorrect reporting, so let’s review the facts.

What Are Loan Level Price Adjustments (LLPAs)? 

LLPAs refer to fees that are based on a borrower's credit score, down payment, and more. When a mortgage lender sells a loan to Fannie Mae or Freddie Mac, the price the agency pays for the loan is adjusted by the amount of the LLPAs.

If greater risk is associated with the loan, such as a higher loan to value (LTV) or a lower FICO score, the greater the LLPAs. 

Understanding the Effect of LLPAs 

An LLPA may or may not change the interest rate of the loan- it depends on the amount of the LLPA. The LLPA affects the sale price of the loan, not the interest rate. Typically, the correlation between an LLPA and the rate is around 4 to 1. 

For example, an LLPA of .50% would most likely lead to an increase of the interest rate of .125%, but an LLPA of .125% may be not significant enough for a lender to change their rate.

May 1, 2023 Update for LLPAs 

Fannie Mae and Freddie Mac are adjusting their matrices for LLPAs. These adjustments will ease penalties for borrowers with lower credit scores.

The matrix also includes additional levels for the highest scores. The previous matrix capped out at 740, whereas the new matrix organizes higher scores into three levels: 750-759, 760-779, and 780 or above. 

For example, prior to May 1st, someone with a 741 FICO score would have been at the top of the matrix. But with the new revision, a FICO score of 780 is required to be at the top of the matrix, while the person with a 741 FICO score is now in the third highest grouping, and may have greater LLPA’s at certain LTVs as a result. 

Borrowers With Lower Credit Scores Will Not See Lower Rates Than Borrowers With Higher Scores

Below is the matrix for purchase loans that goes into effect on May 1, 2023. LLPAs increase with higher LTVs and lower FICO scores with a few exceptions.

Full matrix can be viewed here: https://singlefamily.fanniemae.com/media/9391/display

Some things to note: 

• Loans above an 80 LTV require Private Mortgage Insurance (PMI), making them less risky than loans that are not insured.
• Loans above a 95 LTV are priced slightly better than loans with a 95 LTV. This is because only first-time homebuyers are eligible for loans above a 95 LTV. 
• First-time homebuyers that meet certain income limitations are eligible to waive all LLPAs as part of an incentive to increase homeownership across the country.

Closing Thoughts

The FHFA, which oversees the federally-backed home mortgage companies Fannie Mae and Freddie Mac, has historically sought to present consumers with more affordable housing options. 

FHFA director Sandra Thompson says the new rules are meant to “increase pricing support for purchase borrowers limited by income or wealth” and come with “minimal” fee changes. 

To best navigate the revisions to LLPAs, reach out to your trusted loan officer for more information today.