Life at Altitude with Danielle Connor
I was going to write a “February Fun” post about winter home care tips and enjoying Summit in the Snow- that is until Lender Letter(LL-2022-01) came out on January 5th. This piece of (electronic) paper rocked the lending industry and is going to mean big changes for Buyers who are financing as soon as this month (February). So, just as brokers and lenders are shifting gears, I made the decision to do so as well. Read on to find out what’s coming down the Fannie & Freddie pipeline!
Loan-Level Price Adjustments (LLPAs)
It’s important to know what a Loan Level Price Adjustment is. Fannie Mae & Freddie Mac realized they were undercapitalized and overexposed a little too late in 2008 when the housing market collapsed. Since then, they’ve worked to assess their risk in lending and to adjust the cost of lending accordingly, hence LLPAs which now determine a borrower’s mortgage rate. Loans considered more risky, such as condos, second homes and investments, have higher interest rates than safer investments such as primary residences. It is important to note that LLPAs don’t apply to FHA, USDA, or VA loans.
A glimmer of good news first: for those seeking affordable housing, Fannie & Freddie will no longer charge a high-balance LLPA for loans to first-time homebuyers with income less than or equal to 100% of area median income. This will continue to ensure the existing beneficial pricing treatment of programs like HomeReady, Home Possible, HFA Preferred, and HFA Advantage.
And, the news you’ve been waiting for- pricing for second homes and high-balance loans is being revised for loans purchased on or after April 1, 2022. This revision will affect all lenders, credit unions, and mortgage brokers offering conventional loan products. Upfront fees for high balance loans will increase between 0.25 percent and 1.0 percent, tiered by loan-to-value ratio, and for second home loans, upfront fees will increase between 1.125 percent and 3.875 percent, again tiered by loan-to-value ratio.
What This Means for Buyers
Starting sometime in February (because of the timeline in which real estate transactions close), the cost of obtaining your second home or high-balance loan can go up pretty substantially. A high-balance loan is one whose Loan-to-Value exceeds the current Conventional Loan Limit.
The increase means that for borrowers to get the current market rate, which is already up to 3.75%, lenders will have to charge a second home buyer 3.375 points (an additional $3,375 for every $100,000 borrowed) for a loan with 20% down/80% financing. If the loan then exceeds the Fannie Mae Conventional loan limit ($647,000) and is a Fannie Mae High Balance Loan, say $750,000, the High Balance LLPA also kicks in – up to 1.00%. Therefore, the additional cost to obtain this mortgage would be 4.375 points, or $750,000 x 4.375% = $32,812 in extra/additional cost to get the market rate.
Since we are already seeing rate increases, how far does a buyer’s money go with a loan at 3.5% interest versus a loan at 4.5% interest? In our example above, on a $750,000 home with 25% down, P&I goes from $3,300/ month to $3,800/ month, which is a $500 gap. For many buyers, this is the difference between being able to find a mountain retreat that they’re able to afford, and will likely discourage those buyers from even trying to enter the market.
What’s Next in Lending?
Local banks and credit unions are certainly going to try to take this opportunity to create portfolio loans which will offset closing costs for borrowers by charging a higher interest rate and lower points. Since portfolio loans stay in-house, rather than selling the loan onto the secondary mortgage market, the costs of lending associated with conventional loans won’t come into play, which is what will allow banks to do that. Buyers could benefit hugely from this. In the example above, a portfolio loan of an interest rate of 4% with 2.5 points instead of 3.75% and 4.375 points would be $18,750- a savings of about $14,000!
As for mortgage brokers? They are likely already working with their many lending institutions to navigate which loan products will be available that will help them stay competitive in our mountain market chock-full of second homes and investments. Nothing is set in stone yet, and I’m curious to see what becomes available- stay tuned!