PARAMOUNT MORTGAGE - LENDER'S BLOG

You can't "ballpark" mortgage rates anymore. Home buyers who obtain online quotes from popular websites are receiving nothing more than a starting point for what their final mortgage rate will be.

According to Daniel Green, Mortgage Market Expert, “It's because of a government-led pricing scheme called loan-level pricing adjustments or LLPAs.”

The government has taken the example of risk-based pricing from the auto insurance industry.

In the world of auto insurance, "riskier" car owners pay higher rates for insurance. The sports car pays more than the minivan; the street-parker pays more than the garage-parker; and the low deductible pays more than the high deductible.

In the mortgage world the rate available to you is different from the rate available to your neighbor, and different from anyone else you know, too. Only after submitting a complete loan application and a subsequent cross-reference check is made against the official LLPA table can your personal mortgage rate be calculated.

The easiest way to understand LLPAs is to think of the government as a mortgage market "middle man"; an entity between the mortgage bond market and you.

Indeed, this is how Fannie Mae and Freddie Mac are defined in their respective charters. These entities were formed to be financial conduits between everyday home owners and the multi-trillion dollar mortgage-backed securities market.

Fannie and Freddie also provide a guarantee that mortgage bond holders will get repaid on their investments, regardless of whether underlying home owners are current with their mortgage(s).

This guarantee is why LLPAs exist at all.

Throughout 2006 and 2007 loan defaults increased as home values fell. Fannie and Freddie's respective reserve funds shrank to dangerously low levels. Without reserves these entities would fail to meet their charter obligations and become insolvent.

So now, in order to keep their reserves healthy, the more risk that borrowers represent to Fannie Mae or Freddie Mac, the more they will pay for their mortgage.

LLPAs are made against a multitude of loan traits. For example:

• Smaller down payment borrowers will pay more than ones with larger down payments
• A lower FICO score borrower pays more than one with a higher FICO score
• Mortgages for investment property will cost more than mortgages for primary residences
• Multi-unit home borrowers will pay more than borrowers with a one-unit home

In addition, owners of condominiums may pay more for mortgages than owners of single-family homes, as well as home owners with subordinate financing.

In all, there are eight categories of risk and the government provides up-charges for each category. Thanks to LLPAs, mortgage rates are no longer one-size-fits-all.