Effective April 1, 2009 -- once again -- Fannie Mae is raising its loan fees. You may want to bookmark this page because should mortgage rates fall over the next however-many months, you'll want to cross-reference your eligibility to secure them.The four-part, mandatory loan fee change was announced December 19, 2008, but has yet to be picked up by mortgage lenders on their rate sheets. In the coming days, it will. All four changes relate to Fannie Mae's risk-based fee structure.
More commonly, Fannie Mae's pay-to-play, risk-based fees are known as loan-level pricing adjustments. LLPAs were first introduced in April 2008 and, in the 9 months since, there have have 4 iterations of the chart your see at top -- each more damaging to Americans in need of a home loan.
On the basic Loan-to-Value/Credit-Score matrix above, locate the intersection of your credit score and mortgage loan-to-value. That percentage is your Fannie Mae-mandated loan fee.
Because it function like "points", you can calculate your fee using the formula below:
But loan-level pricing adjustments aren't just limited to credit score and equity percentage. The new Fannie Mae guidelines put three other loan characteristics in play, too.
Condo and co-op mortgages over 75% LTV : Add 0.750 percent to fee
Interest only mortgages : Add 0.250 percent to fee for ARMs, 0.750 for fixed rate
Mortgages under 75% LTV with subordinate financing : Add up to 0.500 percent to fee
And, don't forget that the existing LLPAs still apply. 2-units pay 1 point, cash out refinances pay some more.
The good news here is that loan fees don't have to be paid in the form of cash due at closing -- they can be financed right into your mortgage rate. Historically, 1 percent in fees could be offset via a 0.25% increase to the mortgage rate. But factoring in the cumulative size of the adjustments, this could mean a half-point rate increase or more.
So, even though mortgage rates may fall in the future, applicants subject to risk-based pricing may find that risk-adjusted interest rates aren't be lower at all. And for people in cities like Los Angeles or New York where condos and co-ops are plentiful, it's even less likely.
Now, don't be discouraged if the risk-based pricing model confuses you -- it's actually one with which we're all pretty familiar. Just think auto insurance. v>
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 -- Fannie Mae's highest risk borrowers are paying the highest costs.
But where it gets tricky is that it's becoming increasingly difficult for mortgage rate shoppers to look at published rates online and answer "How do these rates apply to me, specifically?"
And taking that a step further, it's becoming more difficult for guys like me to "ballpark" a rate.
It used to be easy. Loan officers could watch the mortgage-backed bond market and determine whether or not mortgage rates were rising or falling. This is because bond prices set the conforming mortgage rates for Main Street America.
Today, however, bond pricing is just a baseline.
Since April 2008, Fannie Mae has stepped between Wall Street and Main Street nine times 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 mortgage bond pricing plus the fees that Fannie Mae tacks on top.
So, why is now a good time to buy a home or refinance?
Well, for one, these latest LLPA have yet to work their way into the rate sheets. All else equal, rates/fees are lower today than they'll be in a few days. But, secondly, and perhaps, more important, is that this likely won't be the last change we see from Fannie. It will be more difficult to get it financed in the future.
Markets are still contracting, after all.
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