In March of 2008, the US Government, who now is the conservator for Fannie Mae and Freddie Mac, came up with a concept for Conventional Loans.

 

What happened at the end of the last decade was that Fannie Mae and Freddie make, realized that with a portfolio of ‘bad and risky’ loans moving to default and foreclosure, that these two entities were undercapitalized and exposed to the risk of these poor performing loans. Bottom line, both entities were losing money.

 

While the need was to make adjustments unilaterally across all loans, it was recognized that some loans were not as risky as others.

The concept was if you had higher credit scores you represented a lower risk and you could get a better interest rate. Conversely, with lower credit scores, you could be a risker borrower, and hence, your interest rate would be higher

 

Fannie Mae and Freddie Mac have then published a matrix, now as the Loan-Lever Price Level Matrix or LLPA. This matrix went into further detail on how interest rates should be ‘Priced’ to a lender, which ultimately passes on to the consumer.

 

Some of the major factors that weighed in on this matrix for conventional loans included:

• The loan to value of a loan

• The type of loan, purchase vs refi, vs a cash-out refi

• The borrower’s FICO scores

• Having a 2nd mortgage with a first mortgage, or a ‘piggyback’ loan

• Occupancy use, primary vs 2nd home vs investment properties

 

 

For your knowledge, here is the LLPA for Fannie Mae:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What you will see is that a borrower’s rate will have these ‘pricing’ dollar hits, which need to be made up by the borrower in their rate. That is why one borrower cannot say, ‘my neighbor got this rate, why can’t I have it”

Case in point, two borrowers purchasing a primary residence. The purchase price will be $300,000 and will be putting 5% down. One with a credit score of 750 and the other with a score of 665. Here are loan rates are different:

 

 

 

 

 

 

 

 

 

 

​

​

​

​

​

​

 

 

Want to know more, call me, and let’s look at my pricing model! The more you know, the better decision you and your client will make! My cell is 913 915-1855.