When conforming mortgages started defaulting en masse in late-2007, mortgage guarantor Fannie Mae created a loss-offsetting, fee-generating scheme dubbed “loan-level pricing adjustments”.
The concept was basic: For mortgage applicants with high-risk profiles, collect up-front payments to offset potential long-term losses.
Similar to the auto insurance model in which younger drivers pay higher premiums, riskier applicants pay higher fees.
At the inception of the program, Fannie Mae defined “risk” as a combination of borrower credit score and home equity percentage. In general, lower FICOs and higher LTVs paid more costs.
Effective April 1, however, Fannie Mae’s definition of risk is expanded. By a lot. Fannie Mae’s new loan-level fees now impact any conforming mortgage that meets any of the following criteria, with the exception of fixed rate loans of 15 years or less.
- Up to 0.75% fee: Secured by a condo/co-op with less than 25% equity
- Up to 0.50% fee: Features a junior mortgage (i.e. HELOC, HELOAN)
- Up to 1.00% fee: Features interest only payment options
- Up to 1.00% fee: Secured to a 2-unit property
- Up to 3.00% fee: Is designated as “cash out”
Each 1 percent in fees equals 1 percent of the borrowed amount. Therefore, a condo buyer with a $200,000 first mortgage and a $25,000 line of credit is subject to a mandatory 1.25% charge of $2,500, due at closing.
However, it doesn’t stop there. Fannie Mae has also adjusted its original FICO-LTV matrix so that nearly every applicant — irrespective of credit score — will face higher closing costs on their home loan.
Mortgage rates may be falling, but the cost of financing a home is rising.
Fannie Mae’s latest announcement is its fifth risk-based pricing update in the last 15 months. It’s likely it won’t be the last, either. Therefore, if you’re torn between to buy a home now or later, consider that the cost of waiting may outweigh the benefits of falling prices or falling rates.