Let Me Clarify
Mortgage Update: Loan-Leveling Price Adjustments

If you’re in the market for buying a home, some changes are coming. Effective May 1st, 2023, updates are being made to the fees that apply to Loan-Leveling Price Adjustments (or LLPAs).

You may have seen headlines about this in the media, which in my opinion are overly generalizing/politicizing the situation, so let’s break down these changes and who will be affected by it.

What are “Loan-Leveling Price Adjustments”?

LLPAs were introduced in 2008 as a governmental response to the economic downturn stemming from the housing crisis. Based on factors such as your credit score and down payment amount, additional fees were implemented depending on the level of “risk” a borrower presents to the lender.

For example, applicants with lower credit scores and/or smaller down payments would incur higher up-front fees than those with higher credit scores and/or larger down payments. Prior to May 1st, these fees range from 0.00% for borrowers presenting the least amount of risk up to 3.75% for those presenting the greatest amount of risk to the lender.

It’s important to note that this only applies to loans that are backed by Fannie Mae and Freddie Mac. Although this made up nearly 60% of all new mortgages during the pandemic, it also means that not all mortgages are subject to these guidelines.

What changes are being implemented?

As a result of the Federal Housing Finance Agency’s (FHFA) attempt to increase “equitable and sustainable access to homeownership”, the tables used to determine applicable fees are being updated.

While these fees aren’t new, this paradigm shift – as designed – does help some groups more than others. The chart below displays the fee comparison based on credit score and percentage of the home value being financed through a mortgage loan.

Note: the top row within each credit score range represents the current fee and the bottom row within each credit score range represents the new 5/1/23 fee. Further, green rates represent decreases in new fee rates while red rates indicate an increase in fee level.

Who seems to be impacted the most?

Interestingly, the general trend is that the perimeter groups seem to benefit for the most part. And based on the table, those in the top-right quadrant appear to be footing the bill. I’ve also highlighted the specific groups with the largest fee increase and reduction.

Again – as designed – this does benefit those with lower credit scores to provide more affordable housing. But you can also see that many other groups also benefit from the changes. I bring this up simply to show the generalization out there if you come across a heavily opinionated blanket headline from media outlets on either end of the spectrum.

How should I plan for this?

If you’ve read my posts in the past, you know I’m very much a “control what you can control” type of person. So, if you haven’t begun your home search yet, like interest rates in general, you’ll be at the mercy or benefit of the rules at that time.

There are a few things to remember if you happen to be part of the group in the later stages who were not anticipating this change.

  1. This is an up-front fee, not an increase in your mortgage rate! I’ve seen this misunderstanding a few times and just want to clarify (no pun intended).
  2. Despite some headlines, not everyone applying for a mortgage will be hurt by this – some people with high credit scores and large down payments will benefit (as outlined above).
  3. If you do happen to be subject to an unanticipated fee increase, it may be negligible. Of course, some will be subject to a sizable increase in the amount of upfront costs, potentially thousands. However, for those with the smallest rate increase of 0.125%, that’s the equivalent of $625 on a $500,000 mortgage.
  4. It’s likely not a great idea to roll these closing costs into your mortgage. Paying 30 years of interest on these increases could really add up for the population with the largest jump, depending on the value of the mortgage.