The Mortgage Reports Blog

Fannie Mae Adds New Risk-Based Pricing And "Adverse Market" Fees For All Conforming Mortgage Applicants

Effective October 1, 2008, Fannie Mae is making home loans more expensive for Americans.  You may want to bookmark this page because where Fannie goes, Freddie often follows.

The first part of Fannie's two-part change is a remodel on its risk-based fee structure, also known as loan-level pricing adjustments.  The original model was eighty-sixed after just 12 weeks.

To read the fee chart, locate the intersection of your credit score and mortgage loan-to-value.  The cross-section is your risk-based mortgage fee, as mandated by Fannie Mae, and represented by this formula:

Risk-based fees are relatively new to conforming borrowers; mortgage pricing was previously one-size-fits-all.  Today, however, not so much. 

20 different conforming borrowers might be offered 20 distinct mortgage rates and none of the them would be considered out-of-market.  It's one reason why "ballparking" a mortgage rate is so darn tough these days.

But don't be discouraged if the risk-based pricing model confuses you -- it's actually one with which we're all pretty familiar.  Think auto insurance. 

With auto insurance, the cost of a policy increases as a driver's perceived risk to the insurance company increases.  A "safe" profile, in other words, is rewarded with lower premium.

The same methodology applies to loan-level pricing adjustments and, in this sense, LLPAs are strangely fair -- the highest risk borrowers are paying the highest costs.

Fannie Mae's second pricing change, however, is not as democratic.

Across the board, Fannie Mae is doubling its Adverse Market Delivery Charge to 0.500 percent. 

This is a blanket fee that applies to all mortgages that Fannie Mae securitizes, regardless of credit score or loan-to-value.

Everyone pays.

Now, consider: This is the 3rd and 4th time since December 2007 that Fannie Mae stepped between Wall Street and Main Street to alter mortgage pricing. 

This is bad news because rates are supposed to be determined by the price of mortgage bonds alone.

Instead, rates are being set by the price of mortgage bonds plus whatever fees Fannie (or Freddie) tack on top.

And, so long as Fannie and Freddie project a growing number of mortgage defaults in their respective portfolios, we can expect that loan-level pricing adjustments will increase for a 5th and 6th time sometime before the New Year.

Watch this 5-minute video on the mortgage market and you'll understand what I mean.  Guidelines are shrinking, costs are rising, and underwriting is a giant kludge.

So, why is now a good time to buy a home?  Because, all things equal, it's going to be a heckuva lot more expensive and a lot more difficult to get it financed in the future.  Markets are still contracting, folks.  Fannie's new fees are proof.

Freddie Mac Says In Its SEC Filing: "We're Raising Fees On Conforming Borrowers"

We all have a different definition of fun.  For me, it's taking the weekend to do some light reading.  Specifically, Freddie Mac's 1,394-page filing with the SEC. 

Hold your laughter -- mortgage market insight is a major reason why my clients love to have me on their side.

The SEC document itself is kind of a bear so let's just skip to page 72 and read the part that matters to the average, everyday American home buyer and homeowner. 

From Freddie Mac:

"We expect to continue to pursue increases to our management and guarantee fees and delivery fees on bulk and flow transactions to better reflect our expectations of future default costs."

Now, if that passage confuses you, don't be upset.  It's written to confuse you.

See, there's a good reason why SEC filings don't read like Goodnight Moon.  Companies often prefer to obfuscate, especially when reporting financial stability to the SEC.  As a result, SEC filings are written in a language that rivals leetspeak -- if you're not on the inside, you have no idea what you're looking at. 

So, allow me to translate.  In English, the passage from Freddie Mac's SEC filing reads:

"To pad our bottom-line against foreclosures, we plan to increase loan-level fees for all conforming borrowers."

Loan-level fees, you'll remember, are mandatory charges on a mortgage.  Not closing costs, per se, but an interest rate adjustment to every mortgage application. 

In this sense, Freddie Mac's plan to add new loan-level pricing adjustments is like a tax on borrowing and would mark the third round of such fees since loan-level pricing adjustments were first introduced December 2007.

Mortgage rates used to based on the price of mortgage bonds alone.  Today, it's bond prices plus fees from Freddie (and Fannie).  In other words, even if Wall Street mortgage rates fall later this year, Main Street mortgage rates could still rise because of new, mandatory borrowing fees for all mortgage applicants.

Therefore, as we've talked about before, if you're in the market for a new mortgage, time is not your friend.  The longer you wait -- all things equal -- the more likely you'll pay a higher interest rate to borrow money.

Especially if mortgage defaults rise.

Homeowners And Home Buyers : What The Fannie Mae and Freddie Mac Story Means To You

The Fannie Mae and Freddie Mac news stories are everywhere today, including the front pages of most newspaper dailies around the county. Therefore, I'm not going to rehash the story for you. 

Instead, let's tackle the news about Fannie Mae and Freddie Mac from a consumer perspective, highlighting a few of the issues as they relate to everyday homeowners and home buyers like me and you.

12 discussion points follow, written in a plain English-style that won't require interpretation:

Fannie Mae Cheatsheet : New Guidelines Start Monday, June 2, 2008

This weekend, Fannie Mae is overhauling its mortgage approval system.  Earning an "Approve/Eligible" is going to be decidedly tougher than in the past.

For home buyers that have been in the market since January, this is not news; Fannie has been steadily trimming its serviceable market.  Its changes were like duct tape on a leaky vessel.

Starting Monday, it's a brand-new bag and approvals may be sparse.

The good news for borrowers is that Fannie Mae is warning us of the change and will honor all approvals on the "old" system for 120 days. 

Therefore, if you know you'll need a new conforming mortgage within the next 4 months and don't already have a Fannie Mae pre-approval, type this BASIC program into your Commodore 64 and watch the output:

10    Give a complete mortgage application to your mortgage lender
20    Goto 10

Here's a quick look at the new guidelines and what's changing:

Fannie Mae's Loan-Level Pricing Adjustment Chart

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UPDATE (August 4, 2008): Fannie Mae updated its loan-level pricing adjustments.  This post is no longer valid.  It has been updated at The Mortgage Reports.

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You keep hearing (and watching) me say that mortgage rates are down, but that not everyone is eligible for the lower rates.  This chart should help clarify.

To read it, just find the intersection of your credit score and loan-to-value.  The number in the box is the mandatory mortgage fee that mortgage financier Fannie Mae tacks on to your closing costs.

The fee is calculated as:

(Mandatory Fee) = (Loan Size) * (Mortgage Pricing Adjustment) / 100

These added costs are making conforming remortgages cost-prohibitive for a lot of Americans.

How Fannie And Freddie Are Making Remortgages Cost-Prohibitive

Mortgage rates have been trending lower for the last months or so. 

Unfortunately, most people can't take advantage -- government-sponsored mortgage financiers have added mandatory mortgage fees that negate the discount.

It's like buying an item on sale, but having to pay twice the sales tax.

Do The Math : Exactly How Much Money Will Your Credit Score Cost You On Your Next Mortgage

For mortgage lenders, credit scores are a terrific predictor of whether a homeowner will pay on a mortgage. 

The lower the credit score, the less likely the homeowner will pay the mortgage on time.

To protect their portfolios from the riskiest borrowers, therefore, mortgage securitizers Fannie Mae and Freddie Mac are adding credit score-based fees to their loan pricing models. 

This is in addition to the quarter-percent "delivery fees" on all loans effective early-March.

Fannie Mae Gives Us 3 Reasons Why Now Is A Good Time To Buy Real Estate

For the first since the dotcom era, the words "March First" will be associated with excess and speculation.

Effective March 1, 2008, conforming mortgages will carry new fees designed to shield Fannie Mae from further weakness in the housing sector.  This news comes from Fannie Mae's lender-specific Web site.

The site carries an announcement titled "Adverse Market Delivery Charge".  In it, Fannie Mae announces that a 0.250% fee will apply to all loans that it guarantees, effective March 1, 2008.

Fannie Mae and Freddie Mac Raise The Conforming Loan Limit For 2006

Conforming loan limits will be higher in 2006. 

Conforming mortgages are so named because they "conform" to rules of the government agencies that buy mortgage loans from mortgage lenders.  Those agencies are named Fannie Mae and Freddie Mac.  The limits exist to help Fannie and Freddie limit their overall exposure to the housing market and better securitize loans for investors.

The 2006 conforming loan limits will differ by property type and reflect the nation's increasing home values. In 2006, the new limits will be:

• 1-Unit: $417,000
• 2-Unit: $533,850
• 3-Unit: $645,300
• 4-Unit: $801,950

Mortgage loans for more than the conforming loan limits are relegated to "jumbo loan" status.  All things equal, jumbo loans are more expensive than conforming loans because they are not guaranteed by Fannie or Freddie.

In 2005, the 1-Unit conforming loan limit was $359,600.  Therefore, any homeowner whose mortgage balance is between $359,600 and $417,000 can convert an existing jumbo loan to a conforming loan and possibly save money each month.

In addition, homeowners with sub-prime mortgages in the $400,000 range may also benefit from switching into a conforming mortgage product with a lower rate. 

As recently as this summer, sub-prime rates for 30-year fixed mortgages were lower than the equivalent jumbo 30-year fixed mortgage, but higher than the conforming rate.