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

As of October 1, 2008, Fannie Mae is making home loans more expensive for you and me. And 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 nixed 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 stipulated 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, that's not the case as much.

Twenty different conforming borrowers might be offered twenty distinct mortgage rates and none of the them would be considered out-of-market. It's one reason why "estimating" a mortgage rate is so 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.

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