Saturday, January 3, 2009

Fannie Mae increases loan price adjustments

Back in August I talked about how Fannie & Freddie were increasing the costs of the Loan Level Pricing Adjustments (LLPA) and Adverse Market Delivery Charge (AMDC). Basically, these are risk based pricing adjustments meant to compensate Fannie/Freddie for the additional risk they are taking with some loan features. Fannie has just announced a new LLPA matrix which will significantly increase the cost of some mortgages.

Here is an example of the changes made just for FICO & LTV (page 2 of the announcement). Note, this chart is the difference in adjustments between the previous guidelines and the new guidelines effective April 1, 2009:

You will notice significant increases for FICO's below 700 even with relatively low LTV's. In some places where you see very low LLPA difference in a risky area is because the previous adjustment was already very high (1.5%-3.0%) and the new adjustment is only a small increase. Basically Fannie is saying they have previously adjusted (mostly) properly in this area and don't need a large adjustment more.

Here is chart for Cash out refinancing (COR) .

These adjustments are CUMULATIVE. So someone has a high LTV, low FICO, Cash out refinance they will get hit very hard by the pricing adjustments.

Fannie has also significantly increased fees for many Condos (.750%), Interest Only (.250-1.000%) and Investment properties (1.750-3.750%).

Here is an example they give in their announcement how pricing would increase,

Example 3: 30-YR FRM IO, Purchase, Condominium, Credit Score = 690, LTV = 80%
If purchased prior to April 1, 2009
From Table 1: AMDC = 0.250%
From Table 2: Representative Credit Score LLPA = 1.000%
From Table 3: FRM IO = 0.000%
From Table 3: Condominium = 0.000%
Total: 1.250%

If purchased on or after April 1, 2009
From Table 1: AMDC = 0.250%
From Table 2: Representative Credit Score LLPA = 1.500%
From Table 3: FRM IO = 0.750%
From Table 3: Condominium = 0.750%
Total: 3.250%

So the borrower in this instance would have to pay either 2% more in points or have their interest rates adjusted such that they pay the addition through yield. There are several more examples at the end of the announcement to get a feel for how the pricing will have changed.

These risk based pricing adjustments show that credit is still tightening and becoming more expensive. FHA and VA are unaffected by these announcements since they have their own underwriting and pricing requirements. The NAR is protesting these increased fees, though I can't remember them protesting the complete lack of underwriting and underpriced risk adjustment during the housing bubble.

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