Overnight, the Internet has been flooded with news about a “new,” unfair tax on mortgage borrowers with high credit scores. Some have even gone so far as to say that one may intentionally lower their credit score in order to get a better deal.

Before you put off paying your bills in hopes of cashing in, let’s separate fact from fiction. First and foremost, if your credit score is low, you won’t get a better deal on a mortgage rate, even if your nephew texted you a screenshot of a news headline saying “620 FICO SCORE GETS A 1.75% FEE DISCOUNT” and “740 FICO score pays 1% fee.”

So why would your nephew make such a claim?

It all has to do with changes to loan level price adjustments (LLPAs) imposed by Fannie Mae and Freddie Mac (“the agencies”), the two entities that guarantee the vast majority of new mortgages. LLPAs are based on loan features like your credit score and loan-to-value ratio, among other things. They have been changed several times over the years and quite a significant change was announced in January this year.


Wait… this news is from January?! Why are people talking about it now?

Yes, we have already told you about this. People are confused because they don’t understand how “delivery dates” work when it comes to Fannie and Freddie. Changes affecting fees and guidelines are almost always implemented based on the date the loan in question is “delivered” to Fannie/Freddie. “Delivery,” in this context, usually occurs a few weeks after the loan closes, although it can be more than a month.

Now consider that a closed loan is often quoted and closed for more than 3 weeks – call it a month to be safe. Since these changes apply to loans given on or after May 1, 2023, lenders started implementing them weeks ago. Many lenders implement them months in advance – especially for loans that are closed for longer periods.

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So low credit borrowers are already getting the discount while high credit borrowers pay more?

Not at all, and this is where the confusion comes in. Also, from here on out, please note that no opinion is given here as to whether this is good/bad/etc. The sole goal is to dispel confusion and present facts.

The fact is that LLPAs are actually changing in a way that improves costs for those with low credit scores and increases costs for those with high credit scores (in many cases, anyway). But people are confusing change for actual cost.


So a low credit borrower isn’t paying less than a high credit borrower? Is the difference between what they pay as small as it was?

Yes! Again, all value judgments and political commentary aside, the change amounts to a tweaking of the existing fee structure in favor of those with low credit scores and at the expense of those with high credit scores, but there is no scenario where those with low credit scores There will be a lower fee. In other words, don’t skip those credit card payments in the hope of getting a lower rate.


How about some color-coded charts/tables?

I thought you’d never ask. Let’s start with the changes that have everyone so upset. The following table shows the difference in LLPA before and after the change. Red = increasing cost. Green = Falling Cost.++

20230421 nl3.png

20230421 nl1.png

If you only looked at this chart, you could be forgiven for thinking that someone with a 640 credit score was paying less than someone with a 740 credit score, but again, these are just changes.

Let us now look at the table with lumpsum LLPA for similar metrics of credit score and loan-to-value ratio. This is the new structure after the changes are implemented.

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20230421 nl2.png

As you can clearly see now, if you have a score of 640, you will pay significantly more than if you have a 740. Using an 80% loan-to-value ratio as an example, your LLPA at 640 is 2.25%. 740 vs. 0.875% for the score. That’s a difference of 1.375%, or over $4000 on a $300k mortgage. That’s almost half the previous difference, and it’s definitely a big change.


Yes, this is a big change, so why is the government doing this to people with more credit?!

Fannie and Freddie technically have a “mission” to promote affordable home ownership. Here is the statement from their regulator FHFA on the subject: FHFA announces update to enterprise single-family pricing framework,

Note in the first two tables that there is greater improvement for lower FICO lines on purchases (i.e. home ownership vs. ref).


Any other misinformation I should know about?

Yes actually. While not as viral as the LLPA stuff, there has been a fair amount of press on a new 40yr FHA mortgage. There is no new 40yr FHA loan! Lenders who collect payments on FHA loans have a new option to offer loan modifications with terms of up to 40 years to borrowers who are unable to pay back their existing FHA loans.


Don’t you usually talk about the financial markets in these newsletters?

In fact! But since we’ve taken a fair amount of space on the more interesting stuff above, we can keep market recaps fairly low. Rates rose to start the week as economic data was strong on Monday morning. As the week continued, there were several other instances of reactions to economic data at home and abroad, but all of them played out in a sideways range that continues to wait until the first two weeks of May for the most relevant input.


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