PARAMOUNT MORTGAGE - LENDER'S BLOG

by Ruth E. Battle
Paramount Mortgage Senior Vice President

In a highly unpublicized move, Fannie Mae published a new loan level pricing adjustment matrix. In layman’s terms, how does that affect consumers who are obtaining a mortgage?  There are three potential ways this move increases the cost of homeownership.

First of all, Fannie Mae is now charging an “Adverse Market Delivery Charge.” No folks, I didn’t make that name up. It is really what it is being called.  Basically, Fannie Mae will be charging and extra .25% fee on any loan delivered to them after March 1.  The bottom line is that lenders who deliver loans to Fannie Mae (which is practically all lenders in either a direct or indirect fashion) will pass this fee equal to one quarter percent of the loan amount to the consumer.  The fee will either be charged as such, or result in a higher interest rate to the customer so the lender can absorb this new charge.

This charge is a “tax” on any new loan. The money will help Fannie Mae “manage their credit risk,” per an announcement dated December 5, 2007.  While liquidity and credit standards have been under high amount of scrutiny these past several months, the entire market now has to pay for the risks taken by Fannie Mae in the past few years.  There is no expiration on this fee at this point.

The second way the new pricing adjustments will affect consumers is the adjustments tiered with credit scores.  If consumers have a middle credit score of under 680, it may result in additional adjustments – up to a 2% fee- based on the other terms of the loan. Again, this will be charged as a pass through fee or could be quoted as part of a higher interest rate.

The amount of down payment is also part of this equation. If consumers have less than a 30% down payment, the credit score pricing hit comes into play. ARM loans, terms greater than 30 years, cash out refinances and investment property transactions are also potentially affected.

The third area of adjustments is for those transactions with subordinate financing, i.e. a second mortgage. For many consumers over the past five years, a first and second mortgage was a hot product. It allowed customers to avoid mortgage insurance while accommodating low down payments. Now, it may not be so easy to refinance these types of transactions with the additional pricing adjustments and stagnant home values.

With these many changing rules and conditions, it is important for consumers to be  savvy about shopping for a home loan.  Lenders may express these fees differently, so shopping purely on interest rate may not give an accurate cost of financing.  I would recommend consumers request a good faith estimate and truth in lending disclosure to compare loans.  Consumers can refer to the A.P.R. (annual percentage rate) on the truth-in-lending disclosure.  The APR expresses the cost of credit in one number, taking into account rates and fees.  The lower APR expresses the best deal. Consumers can also note that FHA, VA and loans exceeding $417,000 are not affected by these fees.