Breaking Down Loan-Level Pricing Adjustments (LLPA)

New Loan-Level Pricing Adjustments will be in effect on May 1, 2023. What are LLPAs and how will they impact borrowers?

What is Loan-Level Pricing Adjustment?

A Loan-Level Pricing Adjustment is the practice mortgage lenders use to adjust interest rates per borrower based on the assumed risk of loaning money to that borrower. This risk-based pricing policy is mandated by the government and can be compared to the insurance industry policy of increasing auto policy rates for riskier drivers. Overall, higher risk borrowers will have to pay higher interest rates. By using loan-level pricing adjustments, lenders can legally charge increased fees to borrowers deemed "risky" while not raising the fees for the 'safer' borrowers, who are less likely to default on their mortgage loans.

In 2008, when hundreds of government-backed mortgages defaulted in the largest housing crisis in recent history, Fannie Mae and Freddie Mac determined that they needed a safeguard to protect themselves from another crash, and introduced the Loan-Level Pricing Adjustment, where they would be able to charge greater fees.

In order to maintain the appeal of conventional financing, the policy for Loan-Level Pricing Adjustments kept rates reasonable for less risky borrowers, and implemented the ability to charge higher fees for borrowers that carried a higher risk.

An important takeaway is that the price of any mortgage loan, is represented by the interest rate. A higher "price" means the borrower will pay a higher interest rate and a lower price means that the borrower will pay a lower interest rate.

Loan-Level Pricing Adjustment allows mortgage prices to be adjusted by evaluating the different risk factors of any given borrower and basing their interest rates off of the assumed risk. This allows high-risk borrowers to be charged accordingly without penalizing the safer borrowers. Through LLPA, it isn't rare for a borrower to see their mortgage price raised by over 100 basis points - the equivalent of 1%. There are very few incidences when loan-level pricing adjustments aren't imposed on conventional mortgage financing, namely when borrowers with credit scores over 720 are able to purchase a property with a down payment of at least 40%.

When are the new Loan-Level Pricing Adjustments effective?

The updated LLPAs will be effective for all whole loans purchased on or after May 1, 2023, and for loans delivered into mortgage-backed securities (MBS) with issue dates on or after May 1, 2023.

For both whole loan and MBS transactions, Fannie Mae may apply one or more loan-level price adjustments (LLPAs) based on certain loan-level credit risk characteristics. All LLPAs are cumulative. LLPAs are applied according to the following:

Whole loans: LLPAs are calculated on the "Purchase Ready" date (as reflected in Loan Delivery) based on the unpaid principal balance of the loan. All applicable LLPAs will be deducted from the purchase proceeds.
Loans in MBS: LLPAs are calculated on the MBS pool issue date based on the pool issue balance. All applicable LLPAs will be drafted from the lender's account designated for that purpose.
Click Link Below for the Loan-Level Pricing Adjustment (LLPA) Matrix:

Loan-Level Pricing Adjustment (LLPA) Matrix