Today's LLPA fix is not the first

Change taking place today is just the latest toward housing equity

Today's LLPA fix is not the first

Anyone who closely follows the machinations of Loan Level Private Adjustments (LLPAs) sometimes implemented by the Federal Housing Finance Agency – and that’s a relative few among us – knew the reasons behind upcoming changes taking effect today. This exclusive club (think loan originators) also knew of other recent overhauls to the upfront fee structure as it relates to mortgages.

Rebecca Richardson of UMortgage in Charlotte, N.C. is among the cognoscenti, the rare breed who really dig into the minute details of mortgage. And why not? As she describes, with a measure of self-deprecation, in an aside during one of her video primers in “Mortgage Mentor” persona: “By the way, I don’t think that little girls dream of being mortgage brokers, but I do think the fact that middle school algebra made my brain happy and had ‘talks too much’ in my report card was serious foreshadowing.”

And we’re back. Starting today, upfront fees for loans backed by Fannie Mae and Freddie Mac will change toward making the chart more equitable as it relates to borrowers’ credit scores and down payment sizes. The change is largely to close a loophole that gave some in the “sweet spot” between those putting down 15% to 19% down payment – augmented with a nominal amount of mortgage insurance – better rates than those putting down, say 25%.

Both Richardson and colleague Nate Fein of UMortgage in Pensacola broke down the details in a previous interview with Mortgage Professional America. To put the issue in greater context, they reminded of the last significant LLPA overhaul related to second homes.

Hack helped fuel the rise of the short-term rental market

“You gotta go back a little bit to 2022 and when LLPAs were changed significantly for second homes,” she said. “Second homes meaning you Airbnb it. With these loan fee charts, there were certain little down payment cheat code zones – little sweet spots where you could get a hell of a deal. One of those was second homes. You could put 10% down – yes, you’d have mortgage insurance -- and basically have a rate almost the same as if it were a primary residence.”

The “cheat code” surrounding second homes helped give rise to the Airbnb cottage industry, she said: “That’s the reason why Airbnbs took off, because people were like ‘shoot, I can get cheap money without a lot of out-of-pocket. Those got changed in a very significant way last year. And that was because FHFA, when they release their commentary around their mission – and that of Fannie Mae and Freddie Mac – is to support affordable housing – not to subsidize somebody’s side hustle.”

In a statement released last week to debunk motives behind the latest LLPA change (some observers posited it was a move to reward bad credit by having those with larger down payments and better scores subsidize), FHFA’s director, Sandra L. Thompson, reiterated the agency’s mission.

Reiterating the mission of affordable housing

FHFA is first and foremost a safety and soundness regulator, and the Enterprises were chartered by Congress with a mission to provide liquidity, stability and affordability by facilitating responsible access to mortgage credit through their activities in the secondary market,” she said. “To achieve this mission the Enterprises charge fees to compensation them for guaranteeing borrowers’ mortgage payment, which in turn attracts investors across the globe to provide liquidity for the US mortgage market, and ultimately reduces interest rates for homeowners.”

In her statement, Thompson gave perspective on the first major revamping two years ago: “It had been many years since a comprehensive review of the Enterprises’ pricing framework was conducted,” she said. “FHFA launched such a review in 2021. The objectives were to maintain support for purchase borrowers limited by income or wealth, ensure a level playing field for large and small lenders, foster capital accumulation at the Enterprises, and achieve commercially viable returns on capital over time.”

She described how the agency went about leveling the playing field: “We took a series of steps over the past 18 months to achieve these objectives. First, we announced targeted fee increases for second home loans and high balance loans and, later, cash-out refinances.

“Next, we announced the elimination of upfront fees for certain groups core to the Enterprises’ mission, such as first-time homebuyers with lower incomes who nonetheless have the financial capacity and creditworthiness to sustain a mortgage. Finally, in January, we announced a recalibration of the upfront fees for most purchase and rate-term refinance loans. These actions work collectively to create a more resilient housing finance system.”

Hack fix reduced second-home sales significantly

Fain also pointed to the changes made surrounding second homes as an LLPA milestone of sorts: “Another step that they [FHFA] took was when they did another LLPA adjustment last year when there used to be a hack where you could put 10% down on a second home, and you could live there throughout the year and rent it out – Airbnb or Vrbo it. It was a great way for people to start building out short-term rental properties. I originated I don’t know how many loans like that. It was a great hack.”

He explained the motive behind revamping that particular sweet spot: “People who were wanting to buy regular homes – homes they were going to live in as primary residences – had some of those houses snatched up from under them by investors. We still have an inventory crisis in basically every market. So one of the ways you can counteract that is to slow demand.”

Eradicating that hack had the desired effect, Fain said. At one point following the FHFA’s correction, second-home purchases fell by some 35%.

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