Pricing a mortgage loan used to be easy. We looked at the rate sheet the lender faxed us in the morning and found the loan program we wanted and quoted a couple of rates, usually with and without a origination fee. There might be an add-on for non-owner occupied, or an add-on for taking cash out, but it was pretty simple as there were at most two to three factors that might impact rates.
These days, it’s often like doing an algebra problem, and one must know the value of y=(a+b)3 divided by .23965412 plus .1375 minus .034, or so it seems anyway. Factors include the borrower’s credit score, the loan-to-value, the type of property, the occupancy of the property, the type of loan, the term of the loan and what state the loan is in and, in some cases, what county and the loan amount.
All of these little factors are called Loan Level Price adjustments, or LLPA for short. The intent is to price the loan closer to the level of statistical risk it presents. That means the more “risk” factors the higher the cumulative LLPA.
For example a cash out refi of a non-owner occupied condo at 75 percent loan-to-value has a higher risk of default than a owner occupied single family purchase loan. There would be LLPAs to account for the condo, the loan-to-value, and the cash out. As such the condo loan might carry a rate about 5⁄8 to 3/4 percent higher than the owner occupied loan.
Fannie Mae and Freddie Mac have just announced that they are increasing the LLPA next year for any loans they will accept. In general these will add about 1/4 to 3⁄8 percent to the rate above what we are seeing currently.
Previously, if one had a FICO score of 740 or above three and a loan to value below 75 percent for an owner occupied purchase loan one did not encounter any LLPAs. Under the new rules a borrower will have to put down 40 percent to avoid a rate increase, even if you have a 800 score. Those with a 740 credit score that only have 25 percent down will see their rates go up by about 1⁄8th percent due to this new rules.
In addition, on Wednesday of this week the Federal Reserve Board announced that it was time to begin “tapering” of purchases of treasury bills and mortgage backed securities. This news, though widely expected, created considerable waves throughout the stock and bond markets, and caused rates to jump about 1⁄8 to 1/4 percent this week on most mortgage loan programs. A notable exception was that intermediate adjustable rate mortgages actually dropped this week. An intermediate adjustable is a loan that is paid off during 30 years but has a fixed rate for five to seven years. This is a great product if you only plan to be in the house for five to eight years.
TRAIN IS LEAVING THE STATION
If you have not refinanced yet, then the train is leaving the station and the 3.5 percent rates we loved earlier this year are now the new mid four percent rates. I think it could easily get back to five percent by next summer. I would suggest if you need to refi call and do it now, it will cost more after the holidays.
But the good side to this is we are seeing a resurgence of private label lenders coming to the mortgage marketplace with their own money, which will somewhat offset the Fed tapering as new money flows in from private sources that have been sitting out residential lending the past few years.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. A collection of his ‘best of” columns is on his website and blog at www.mtnmortgageguy.com