A Loan Level Price Adjustment, or LLPA, is a risk based method to determine the fee required by Fannie Mae and Freddie Mac on conventional mortgage borrowers for the purchase or refinance of a home. LLPA's do not apply to VA, FHA, USDA, and certain jumbo or other specialty or Non-QM loans.
What is a Loan Level Price Adjustment?
LLPA's have been a part of the conventional mortgage since their introduction in April of 2008 and were brought on following the housing market crash. In the late 2000's a high volume of government backed loans began foreclosing which opened the government mortgage system to greater risk exposure than they could tolerate. Losses were increasing which would threaten the availability of home financing moving forward. The path to recoup the financial losses from the excess of failing loans was to increase fees. Fannie and Freddie understood some loans carried more risk than others and wanted a fee structure that took this into account and the fees were fairly imposed relative to the risk level of each loan.
This is when the LLPA's were born. An LLPA is quite literally an adjustment to the "price" of the loan. It is a percentage that gets added to the rate. The higher the risk or more risk categories associated with a loan, the higher the rate. LLPA's are the governments way of having riskier borrowers pay a higher premium without putting a penalty on the loans that carry less risk. The concept of pricing based on the risk is utilized in a variety of other industries to include car and life insurance. Less risk factors = lower premium.
LLPA's and Advertised "Average" Mortgage Rates
Each week in the Primary Mortgage Market Survey (PMMS) reports the average mortgage rates available to US borrowers. These rates can be misleading or seem quite elusive to many borrowers. A borrower may read about an average rate the 5's but when seeking quotes from lenders the rate quoted is quite a bit higher. The frustrated borrower may feel it's a bait and switch or assume a particular lender has high fees. While this could be the case, often times a majority of the difference in rate is due to the government imposed LLPA's.
Risk Factors that impact Loan Level Price Adjustments
When applying for a mortgage, the lender will assess over a dozen characteristics. Some items are related to the borrower's finances such as credit score and debt-to-income ratio, while other characteristics are based on the loan or property type. These could include occupancy, condo vs single family, number of units, loan to value, purchase vs refi. All of these factors are compiled to determine the LLPA for that specific borrower and specific mortgage transaction.
The Role of Fannie Mae and Freddie Mac
Fannie Mae, along with Freddie Mac are the leading sources of mortgage financing in the US. They are government sponsored entities (GSE) that are regulated by the Federal Housing Finance Agency (FHFA). Their role in the housing finance system is to buying back mortgages from lenders. These are either held or packaged into Mortgage Backed Security's. This process provides liquidity, stability and affordability to the mortgage market. By packaging up mortgages into MBS, they guarantee the timely payments from the borrowers which attracts secondary mortgage investors, thus providing more funds available for housing.
Who determines the LLPAs?
Fannie Mae and Freddie Mac are responsible for evaluating risk and setting the LLPA's. The specific LLPA values are broken out using a series of matrices. Each provide the range of LLPA values for a loan based on different aspects relating to the borrowers finances (credit score), the loan type (loan to value, high balance loan), the property (home vs condo vs manufactured home, number of units, occupancy) and/or the financing type (purchase vs refinance).
Fannie and Freddie are also responsible for reviewing and evaluating that all government loans meet this requirement. This is to protect the system and ensure mortgage financing continues to remain available and affordable as possible. Any loans that are found later to have an issue, cannot be bought back and the lender must hold onto that loan until the loan is satisfied. If this occurs to frequently the US mortgage system could run into serious affordability and availability issues.
Overview: LLPA Matrix Table 1
Below is the LLPA Matrix that shows the LLPA for loans originated after May 1, 2023 broken down by Credit Score vs Loan to Value Ratio. To help the change in value stand out, gradient shading has been added to the chart. The darker green areas of the chart highlight the scenarios/variables that have lower LLPA's - credit scores over 680 and LTV's of 95% or below. The lighter green to white areas have significantly higher LLPA's. The Fannie Mae guidance includes 8 tables in all that help lenders to calculate the proper LLPA based on the specific loan features.
How do I decrease the LLPA's on my next purchase?
While I was hoping to keep this article top level, many things mortgage can quickly end up down in the details and LLPA's are no exception. This more complex rate and home financing information isn't often discussed, as it can be quite confusing. For the most part LLPA's happen behind the scenes and are required by regulation so they can't be arbitrarily applied by the lender or "shopped" by the borrower.
A great first step is to find an experienced mortgage broker that has the mortgage products and experience to help you achieve wealth through homeownership. They will partner with you throughout the process, providing guidance and educating you on loan products available, as well as evaluating the costs involved. Understanding your options and the costs allows you to make an informed decision on the most beneficial path forward for your specific home purchase or refinance.
Simplicity Mortgage is here to help. We have the experience and loan products to close you quickly and confidently! Contact me today to discuss your real estate goals! 386-401-9000