Friday, November 16, 2007

GSEs Tighten Up Loan Pricing

by Tanta on 11/16/2007 08:16:00 AM

Bloomberg reports (hat tip to Bob_in_MA) that the GSEs are adding additional Loan Level Pricing Adjustments (in Fannie-speak) and Postsettlement Delivery Fees (in Freddie-speak) for loans delivered on or after March 1, 2008. What's new and different about these new fees is that they apply to "standard" loans; there are already pretty serious fees being charged for the ones made under the special A Minus/Expanded Approval/"Flexible" programs.

Specifically, they apply to any mortgage with an LTV greater than 70% and FICO less than 680. They range from 75 bps for loans in the 660-679 FICO bucket to 200 bps for loans with FICOs less than 620. These new fees are also cumulative, so they apply on top of the existing fees the GSEs charge for things like high-LTV cash-outs (50 bps for LTVs between 70% and 80% and 75 bps between 80% and 90%). So today, a borrower with a low-average FICO of 675 can get a cash-out up to 90% LTV with a 75 bps fee; that will turn into a 150 bps fee next March.

As most borrowers, especially refinancing borrowers, don't pay points in cash, these fees will either end up as points that are rolled into the loan balance or as higher interest rates. Assuming a rough price:rate ratio of 3:1, that means a note rate 0.25% higher for our hypothetical "average" cash-out borrower.

The Bloomberg article also indicates that Freddie is lowering its maximum LTV for properties in a declining-value market. Actually, the rule in question (reduce maximum LTV by five points in declining markets) has been around since Hector was a pup for Fannie and Freddie and lots of other investors; Freddie is dusting it off and reminding everyone that it exists. For those of you who have become appraisal-issue addicts, here's what Freddie's Bulletin says:

We use http://www.ofheo.gov/hpi_download.aspx to help identify declining markets. This is an example of a tool you may use to help in determining whether a Mortgage is subject to our maximum financing limits.

Underwriting expectations – maximum financing in declining markets

With respect to underwriting requirements, when the property securing a Mortgage is located in a declining market, Sellers must:

􀂄 Determine whether any contributions are interested-party contributions as described in Section 25.3, if any contributions are offered.

􀂄 Determine the maximum interested-party contribution limits based on the lower of the appraised value or the sale price, if applicable

􀂄 Adjust the sale price of the property by deducting the total dollar amount of any sales concessions from the sale price of the property. Sales concessions are defined in Section 25.3.

􀂄 Calculate the LTV/TLTV ratio based on the lower of the appraised value or the adjusted sale price.

􀂄 Restrict the maximum LTV ratio to at least five percent less than the maximum ratio allowed for the transaction. If there is layering of risk, the Seller should consider higher restrictions to the maximum allowable ratio to address market conditions and the risk in the transaction.
That's not new; old underwriting hands can recite these rules at cocktail parties if you are silly enough to encourage them. This bit, though, is new:
Interested party contributions in the form of financing and sales concessions are becoming more common due to market conditions. Currently, we require that maximum financing concessions be determined based on the LTV ratio of a Mortgage. Because maximum financing concessions and lower Borrower contributions are particularly prevalent in transactions with secondary financing, we are changing our guidelines to require that maximum financing concessions be based on TLTV ratio when secondary financing is present, and LTV ratio when there is no secondary financing.
Translation: no more getting around financing concession rules by structuring the loan with a low LTV and a high CLTV (TLTV in Freddie-speak). Whether this will be a big deal or not depends on how many subordinate-financing lenders are still standing in March 2008, of course.

It is fairly typical for the GSEs to make major changes to their rules with a fair amount of lead time: they try not to reprice loans that were already approved or committed to a customer or in the lender's MBS pipeline. Still, these March deadlines are for loans delivered to the GSEs on that date, not loans made on that date. Therefore, these pricing adjustments will be made to lender rate sheets signficantly before March. Merry Christmas.