Wednesday, August 6, 2008

Robin hood?

"Little John: You know somethin', Robin. I was just wonderin'. Are we good guys or bad guys? You know, I mean, uh… our robbin' the rich to feed the poor.
Robin Hood: Rob? Tsk tsk tsk. That's a naughty word. We never rob. We just sort of borrow a bit from those who can afford it.
Little John: Borrow? Boy, are we in debt.
"-Robin Hood, Disney Animated Film

Fannie Mae announced that they will change their Loan Level Pricing Adjustments (LLPA) and raise their Adverse Market Delivery Charge. The LLPAs are variable depending on the loan FICO and LTV. They raised the fees in some areas and lowered it in others. They Adverse Market Delivery Charge is a flat fee per loan that was raised from .25% to .50%. I will take a crack at a possible explanation for the changes. For background you can look at the charts for purchases displayed in the announcements, here is the old fee structure and here is the new.

What I did was combine the Adverse Market Delivery Charge with the LLPA fees and then took the difference between the results and we get the following:

(click to enlarge)

You will notice that the fees impact the people with downpayments the most. Basically, they feel like they have pricing power in this group.

Looking at the last May 2008 LTV chart, I added a shaded area to correspond with the downpayment size getting hit with the most fees.

(click to enlarge)

Loans are very concentrated around this point. Everyone to the left of the pink area gets hit by only a .25% increase, possibly a recognition that these loans are ultra-safe and banks might portfolio them instead of selling them to secondary if the price gets too high/attractive. Everyone to the right (ignore VA and FHA, I don't believe they get assessed these fees) is private mortgage insurance territory. Basically, Fannie isn't putting any more pricing pressure on the MI companies since MI above 90% is getting scarce. They are also trying to limit fees on the more economically sensitive borrowers. Fannie will definitely get flack for raising fees but I'm sure they will point out to their friends in Congress that they are trying to take from the rich, not the poor.

1 comment:

GS751 said...

A very interesting take and great research. I think there is going to be a lot more "creative" accounting in the future.