Both Fannie Mae and Freddie Mac offer far lower rates for first-time homebuyers than they do for similarly qualified repeat buyers.
LLPAs = Rate Increases For Various Attributes
A few years ago, Fannie Mae remembered that it was effectively a monopoly because it and Freddie Mac get the full backing of the federal government – meaning that the government effectively guarantees the performance of every loan underwritten to Fannie and Freddie standards. Those loans are called “conforming loans” because they conform to Fannie/Freddie guidelines.
This is ostensibly good for America because that government guarantee makes interest rates for homebuyers as much as 1.5% lower than they otherwise would be, according to many analysts like Chris Whalen.
Anyway, when Fannie remembered that it does not have competition because it is effectively just a government program, it changed its “Loan Level Price Adjustments” or LLPAs.
While the LLPAs were sold to us as ways for charging borrowers for extra risk – which they are to some extent – it occurred to me that that LLPA could also stand for “Living Life Pretty Abundantly.”
This is because Fannie Mae is ridiculously profitable – and those profits from the LLPA charges just go to the executives and to the government (more on this in subsequent blogs).
I blogged about LLPAs last year: Fannie’s Greatest Hits; First-Time Buyers Don’t Get Hit!
LLPA Examples
Credit scores are an excellent example of how LLPAs impact rates. A borrower putting 20% down with a credit score of 780 will have a rate that is 3/4% LOWER than the same borrower with a credit score of 650.
A borrower putting 20% down to buy a single-family residence will get a rate that is about 1/4% lower than the same borrower buying a condo.
Lower down payments also come with higher LLPAs.
First-Time Homebuyers Don’t Get Hit with Any LLPAs
First-time homebuyers don’t get hit with ANY of those LLPAs.
So, even if a first-time homebuyer is a condo buyer with a 5% down payment and a 660 credit score, she will get the same rate as another buyer with a 780 credit score putting down 25% for a single-family residence.
And THAT is why my rate quotes are always for first-time borrowers with my assumptions clearly stated.
A. I want to put our best foot forward when quoting rates; and
B. I want to make it abundantly clear just how LOW first-time homebuyer rates are.
Misleading Marketing
I make my rate quotes very clear though in our assumptions and by blogging about them from time to time: Why So Many Lenders Have Rates Below the National Average (it’s not what you think).
Interestingly though, we’ve seen a few lenders tout the LLPA waivers for first-time homebuyers as actual credits – coming from the lender.
And that is why I am blogging about them again today.
We recently saw a flyer for a $390,000 purchase with “$12,000 of credits.”
Those very “generous credits,” however, were actually just LLPA waivers that every lender in America can offer to every first-time homebuyer in America.
LLPAs are quoted on rate sheets as if they are “points” and then lenders just have to increase their rates to absorb or cover those points with additional yield premium or rebate.
Clever marketers though are convincing borrowers and agents that the waiver of those points for first-time homebuyers are credits.
This is just another reminder to not be misled by clever marketing.
