Upcoming conventional fee changes are closing a 'cheat code' loophole, these brokers say

Changes to upfront Fannie Mae and Freddie Mac fees will take effect May 1

Upcoming conventional fee changes are closing a 'cheat code' loophole, these brokers say

Come May 1, upfront fees for loans backed by Fannie Mae and Freddie Mac will change, reducing costs for some borrowers with smaller down payments and raising fees for some buyers who make larger down payments. The move has been singled out as forcing those with better credit and larger down payments to subsize those with worse credit and fewer funds. However, brokers who spoke to Mortgage Professional America said the changes essentially close a loophole that had long yielded more favorable rates to some borrowers.

The new rules affect the Loan Level Price Adjustments (LLPAs), which are fees that depend on various metrics – credit score, down payment size, type of home, and others. The upcoming changes relate to the first two of those metrics – credit score and down payment. But an interesting thing happened on the way to communicating the expected conventional fee changes. Take this Las Vegas Review-Journal editorial headline as an example: “Housing proposal would punish those with good credit.” Or this more succinct one from the Toledo Blade: “Rewarding bad credit.” 

Not quite, a couple of brokers told MPA.

Mortgage loan originator Rebecca Richardson of UMortgage in Charlotte, N.C. said the LLPA fee adjustments largely revolve around folks putting down between 15% and just under 20% – what she calls the “sweet spot” or “cheat code” in the LLPA chart. “We would tell our clients: Put 19% down and take the mortgage insurance,” she told MPA in a telephone interview. “It probably sounds counterintuitive, but you can pay it one time; you don’t have to pay it monthly, and you’re going to get about 1/8 better in rates. They would say ‘you’re brilliant.’ That’s what’s going away. That’s because the problem was if you were in that 15% to 20% band, you were getting better terms than somebody who put 20% down and that’s because that mortgage insurance made you less of a risk. But people were almost over-incentivizing to put 15% instead of 20% because those 15% to 20% buyers were getting the same terms as somebody putting 25% down.”

Talk about subsidizing: “So if we’re going to use the same language that people with lower down payments are being subsidized, that was already happening,” Richardson said. “Now, that 15% to 20%  band is not the outlier.

It’s all about eliminating the sweet spot

To be sure, the revamping also will help those making lower down payments – but not because of de facto subsidies from those with higher credit scores and the financial wherewithal to put down larger down payments, she suggested. “Buyers  who are more than 3% -- their terms got better. Not better than somebody with the same credit score but more down payment, but better than they were because they were being very much penalized.”

She provided these examples of new and old fee structures based on a FICO score of 740 for borrowers with varying down payments buying a $400,000 home:



3% down

17% down

20% down

Old fee:

.75% = $2,910

.25% = $830

.50% = $1,600

New fee:

.50% = $2,000

1.0% = $2,800

.875% = $2,800


The days for that “sweet spot” are numbered.

You could also call it a rate hack

Nate Fain, branch manager at UMortgage in Pensacola, Fla., echoed Richardson’s assessment of the changes to the Fannie Mae and Freddie Mac single-family pricing frameworks, which take effect May 1. “I’ve seen the headlines, and I’ve seen how a lot of this has been portrayed,” he told MPA in a telephone interview. “Realistically, what’s happening here is there was a bit of a loophole – a rate hack, so to speak – and it was for people who understood it. It’s even a strategy that I’ve used in the past with my clients. It was a sweet spot in the rate sheet, and it was a great strategy for someone who’s got pretty solid credit and would pay, say, 15% down. It’s a loophole that’s going away.”

Even as a broker who availed himself of the hack on behalf of clients, he found the rate discrepancy odd: “From a high-level perspective, one of the things that was always strange to me was when you think of risk the way the rate sheets were, the way everything was priced out, it was actually cheaper for someone to put 15% down than someone who put 20% down. It was seen as something less risky. Most people, if you poll them would say ‘well, if you’re putting a bigger down payment, you should be rewarded – which makes sense. So, there was this little 15% hack where you would pay a little, tiny bit of mortgage insurance and get a better rate than if you were putting 20% down. I don’t feel like they’re subsidizing anyone. This is yet another loophole the FHFA has identified, and it’s closing.”

The FHFA doesn’t exist to help people build real estate empires, Fain suggested. “They’ve taken a pretty big stance,” he said. “They’re flat-out saying they’re here to support home ownership, not necessarily to help people build real estate portfolios. There are a lot of companies and investors building real estate portfolios. I’m not against that, I’m all for that. I am not against people building their real estate portfolios. However, when you’re using Fannie Mae and Freddie Mac products to do so, that’s not really what the intentions of those entities ever were. It’s always been the plan to get them back to ending that conservatorship. That’s always been the plan, and this is just another step in that direction.”

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