How would you like to pay a different price for two cheese enchiladas at your favorite local Mexican restaurant, depending on the table you sat at, or how much you weighed, or what kind of credit card you were going to pay with? Yes, some of that exists, but the vast majority of prices a consumer pays aren’t based on that particular consumer’s attributes.
Mortgages are different, and some types of loans have “loan-level pricing adjustments” (LLPAs). These adjustments, which have been in the news recently and impact all lenders, are risk-based fees, or “bonuses,” assessed to mortgage borrowers using a conventional mortgage. Adjustments exist in other programs as well. Loan-level pricing adjustments vary by borrower, based on loan traits such as loan-to-value (LTV), DTI (debt to income ratio), credit score, loan purpose, occupancy, and number of units in a home.
The adjustments exist because certain attributes have been found to be riskier than others. The losses seen on an historical basis are higher for high LTV loans, for example, or lower credit score borrowers. In terms of pricing, think of them as add-ons when buying a new car for a sunroof, or a fancy paint job.
Sovereign’s management mentions this because the Federal Housing Finance Agency (FHFA), which oversees Freddie Mac and Fannie Mae, announced that it has rescinded the upfront fees based on borrowers’ DTI ratios for loans acquired by Fannie Mae and Freddie Mac (the government sponsored “Enterprises”). FHFA announced in March it would delay implementation in order to engage with industry stakeholders and better understand their concerns.
The FHFA announcement rescinded the debt-to-income-based loan-level pricing adjustment proposed in January, then delayed until August, now delayed period. That proposal would have made significant adjustments to LLPAs, that Fannie Mae and Freddie Mac charge on conventional loans they purchase. Sandra Thompson, who heads up the FHFA, said, “To continue this valuable dialogue, FHFA will provide additional transparency on the process for setting the Enterprises’ single-family guarantee fees and will request public input on this issue.”
This is all good news for Sovereign Lending Group’s borrowers. The adverse impacts of the fee to consumers and lenders were apparent across the entire industry. The implementation of a DTI-based LLPA would have led to numerous problems, including multiple changes to a borrower’s pricing throughout the loan application process, operational and system issues, compliance implications related to TILA-RESPA Integrated Disclosures (TRID), compromised borrower trust and post-closing quality control (QC) issues.
SLG’s management and our loan officers understand the need for mortgage pricing based on the risk attributes of the borrower, or of the property, but announcing and implementing any pricing changes need to be well thought out and made with an eye on first-time home buyers and under-served borrowers. Sovereign Lending Group applauds the FHFA’s move!