Homebuyers with Good Credit Face New Challenges with Loan Level Pricing Adjustments

Introduction

Recent changes to loan level pricing adjustments (LLPAs) at Fannie Mae and Freddie Mac, ordered by the Federal Housing Finance Agency (FHFA), have resulted in higher upfront fees for many homebuyers, especially those with good credit scores. While the changes bring some positive developments for first-time buyers and those with low or moderate incomes, middle-wealth borrowers with good credit are facing financial challenges. Let's delve into the implications of these new adjustments and the concerns raised by industry stakeholders.

Key Points

1. Background: Since 2008, Fannie Mae and Freddie Mac have charged LLPAs based on individual borrowers' credit score, down payment, and other risk factors. Last year, the FHFA raised guarantee fees on second homes, conforming jumbo mortgages, and high-balance cash out refinancing loans.

2. The Latest Changes: The new LLPAs penalize many buyers with good credit scores (above 680) who put down 5% to 25%, as well as those with high-balance adjustable rate loans. However, these fees do not apply to Fannie and Freddie’s affordable mortgage programs, HomeReady and Home Possible, or to non-conventional government-backed loans.

3. Impact on Borrowers with Good Credit: Homebuyers with good credit scores are now being penalized with increased fees, making it more difficult for them to secure affordable mortgages. This new approach has raised concerns among industry stakeholders.

4. Positive Changes for Higher-Risk Borrowers: Borrowers with lower credit scores and large down payments are now seeing reduced fees, although they can still expect to pay more than those with good credit. Additionally, changes made in 2022 that reduced or eliminated the LLPA fee for first-time buyers and those with low or moderate incomes have been made permanent.

5. Industry Response: The National Association of Realtors® (NAR) has urged the FHFA to rescind the higher fees for middle-wealth borrowers with good credit scores, arguing that the increases are unnecessary given the current financial strength of the GSEs. NAR is also opposing a new fee on borrowers with debt-to-income ratios (DTIs) greater than 40%, which the FHFA plans to impose starting August 1st.

Conclusion

The recent changes to LLPAs have raised significant concerns for homebuyers with good credit scores, who now face higher upfront fees. These fees, coupled with the recent jump in mortgage rates, create an increasingly challenging environment for middle-wealth borrowers. As industry stakeholders continue to advocate for more equitable adjustments, homebuyers with good credit should stay informed about how these changes could affect their mortgage costs.