We’ve been getting a lot of questions about the new LLPA (loan level price adjustment) for Conforming loans and if people with worse credit will really get better rates than borrowers with excellent credit.  The short answer is NO, and your clients should never intentionally damage their credit.  Surprise, surprise, there’s some entirely incorrect information circulating that your clients may be exposed to.  Below is an explanation and FAQ’s:

What is changing?

Fannie May & Freddie Mac base pricing adjustments for credit scores & down payment are changing.  Borrowers with a lower credit score & lower down payment will not be as heavily penalized.  And, borrowers with best case scenario credit scores & down payment will receive less of a benefit than before.  So, the difference in rates between best case credit profile vs. lower credit score will be less significant.  These changes apply to every conforming loan funded by each & every mortgage company.

Does this mean borrowers with lower credit scores get better terms than those with higher credit score?

No.  People will still be in better position with a better credit & more down payment.   The difference between excellent & lower credit tiers will be less significant.

When does this go into effect?:

It’s been priced into rates for over a month now.  The May 1^st date is when these adjustments go into effect for the mortgages purchased on the secondary market by Fannie/Freddie.   Banks knew this was coming, so these changes have already priced in and borrowers will not see any changes to rates over the next week, outside of the normal day to day bond/rate fluctuations.

What is the FHFA trying to achieve with these pricing adjustment? 

We all know Fannie/Freddie’s mission to increase access to affordable housing.  It’s always been their mission and it’s been a priority for the director of FHFA.   The new director of the FHFA has been vocal in disapproval of the solutions provided by Franny and Freddie and she thinks more is required of them to increase access to affordable housing, and she thinks this will help increase access to affordable housing.

Is this a good idea and will it work?:   We don’t like it but the whole world has to deal with it, so it is what it is at this point.  We do not see these pricing changes moving the needle in making homeownership more attainable for more Americans because even after these changes a borrower with low 600’s credit score is still better off going with an FHA loan, and those who have done a great job managing credit are stuck a hair worse pricing.  A better idea would be a campaign to educate people on how to manager credit; it’s not complicated and the information could be shared on something as simple as this one page I put together and have been sharing with clients for over a decade (see attached).   WE (all of us on the real estate community) continue to be the front lines in educating the public on all things related to buying, investing, & enjoying real estate.

Credit Health Tips

If you want to dig into the details, here are some example of scenarios that will be most affected: Attached is a matrix showing which scenarios have pricing improvements (green) vs. hits (red), relative to the old standard LLPA’s.

• LTV’s in the 80% – 85% range are most significantly affected, so more borrowers in the ~19.99% – ~15% down might consider just doing 10%.
• Cash-out refinances hits are mostly greater, unless you have top tier (>780) credit, or extremely low LTV (<30%).   So, cash-out refi is actually a scenario where if credit is >780, pricing adjustments have improved.
• Price improvements for 2 & 3 unit properties.
• Price improvements for low LTV investment properties.
• Vacation Homes & Investment Properties essentially priced the same now.

LLPA Changes 2023

“Bringin’ on the heartache, Can’t you see?, Can’t you see?” Bringin’ on the Heartbreak? Def Leppard.

SVB Failure and Rates

It’s important to remember that bonds enjoy bad news, so when word broke earlier this week that SVB was shuttered by the FDIC, home loan rates improved to their best level in six weeks. At the same time, the 2-year Note yield, which tracks Fed rate hike activity, plummeted from over 5.00% to under 4.00% in just a couple of days. This was an epic decline in rates not seen even after 9/11 or the Great Recession.

The good news (in the case of SVB and even Signature) is that bad management, failure to manage interest rate risk and a widespread desire for depositors to gain access to their funds (bank run) is what caused these banks to shutter.

In response, the Federal Reserve immediately created a line of credit and an implicit backstop to protect any depositors from any losses. This was good news and will hopefully limit any further fallout in the banking sector.

So, what does the Fed do with rates now that we have high uncertainty and contagion risk in the banking sector?

Stability > Inflation

Seeing that one reason SVB failed was in response to a rapid rise in interest rates, there is increased pressure for the Fed to limit rate hikes going forward and regain stability in the financial sector.

Just last week there was a high probability the Fed would raise rates by .50. Now just days later, there is a 75% chance of a .25% and a 25% chance the Fed doesn’t hike rates at all.

Next week’s Fed Meeting and press conference will hopefully have the markets feeling that the Fed is going to take every measure possible to ensure stability while they closely watch the pace of inflation decline.

Housing Numbers OK

It wasn’t all bad news this week. Housing numbers for February highlighted the little rate relief we saw in January and brought some optimism into February. Both Housing Starts (which is putting the shovel in the ground), and Permits (a leading indicator of future building), came in better than expectations.

This bodes well for housing in the months ahead, especially combined with the rate relief we are experiencing.

Bottom line: This week’s news in banking has changed everything as it relates to the Fed and rate hikes. The markets are suggesting the Fed will be cutting rates in the second half of the year which is a big change from the rate outlook just days ago.

Looking Ahead

Next week brings the Fed Meeting and monetary policy decision. As we shared, it appears the Fed is only going to raise rates by .25%, rather than .50% to foster stability in the financial markets and avoid contagion in the banking sector. What the Fed says will be important in bringing calm to the markets during this uncertain moment.