The Federal Housing Finance Agency (FHFA) recently made a significant announcement regarding the removal of the debt-to-income (DTI) loan-level price adjustment (LLPA) change. This decision has been met with support by pretty much everyone in the mortgage industry. In short, the government agency (FHFA) was trying to add a fee to all mortgages for people who had a “high” debt to income ratio of above 40%.
What are Loan-Level Price Adjustments (LLPA)?
Loan-Level Price Adjustments, commonly referred to as LLPAs, are an integral part of mortgage pricing. They are charges imposed by government institutions, Fannie Mae and Freddie Mac, to compensate them for additional risks associated with specific loan characteristics. LLPAs are used to offset potential losses resulting from factors such as lower credit scores, higher loan-to-value ratios, “riskier” property types (condos, duplexes, triplexes, etc), and other borrower or loan attributes that may increase risk for Fannie Mae and Freddie Mac when they buy mortgages.
How LLPAs Affect Loans
LLPAs play a pivotal role in mortgage pricing, as they impact the interest rate and cost of a loan. Lenders have to add up all of FHFA’s LLPA fees based on the loan characteristics to come up with a total price for a given interest rate on any day. The more LLPAs assessed to a file then the higher interest rates or fees for a rate will be on their loan.
Recent FHFA Announcement
FHFA, after a lot of pressure from the mortgage industry, announced the removal of the DTI LLPA change that had been postponed to August 2023. The elimination of this LLPA is a shift in the direction of providing affordable homeownership, which is the goal of Fannie Mae and Freddie Mac.