Fannie Me and Freddie Mac will be enacting their new loan-level price adjustments (LLPAs) starting on May 1, 2023. These LLPAs mark a significant change to the mortgage market, as they ostensibly make homeownership more affordable for borrowers with lower credit scores, while also ensuring that Fannie Mae and Freddie Mac remain financially sound.
How? Well, under the new LLPAs, borrowers with credit scores below 680 will see their fees reduced, while borrowers with credit scores above 780 will see their fees increased. The changes are intended to close the gap in mortgage costs between borrowers with different credit scores.
The LLPAs have been met with mixed reactions. Some consumer advocates have praised the changes, arguing that they will make homeownership more affordable for borrowers with lower credit scores. Others have criticized the changes, arguing that they will unfairly penalize borrowers with good credit.
Of course it’s arguable that the LLPAs violate the Equal Credit Opportunity Act (ECOA), a federal law that prohibits discrimination in the extension of credit. The argument is that even though the ECOA does not explicitly prohibit lenders from discriminating on the basis of credit score, the LLPAs violate the ECOA because they discriminate against borrowers with high credit scores, as they are charged higher fees just for having higher credit scores.
Biden’s administration defends the LLPAs as necessary to ensure that Fannie Mae and Freddie Mac remain financially sound by reducing the risk of another financial crisis. Critics have responded to that by pointing to the 2008 bail outs of Fannie Mae and Freddie Mac, and that the government should not be in the business of picking winners and losers in the mortgage market.
Basically, the supposed intent of the LLPAs is to make homeownership more affordable for borrowers with lower credit scores, while also ensuring that Fannie Mae and Freddie Mac remain financially sound.
It remains to be seen how the housing market and the courts will respond to these LLPAs.
Here’s the Loan Level Price Adjustment Matrix.
