Mortgages More Expensive? What’s happening with Risk-Based pricing.

January 28, 2011 at 3:45 PM 1 comment

Yes, it’s true.  Mortgage loans are about to become more expensive with the expanding risk-based pricing matrix from FannieMae and Freddie Mac.  This video highlights the upcoming changes:

“First, what is risk-based pricing?  A number of years ago, FannieMae and FreddieMac determined that certain loan characteristics carried more risk, and the borrower, or loan terms, that were in a higher risk category would pay higher costs.  This was generally a fair way to allocate cost.

More recently, they added a quarter point “adverse market” fee.  I like to call this a “the-government-sponsored-agencies-are-losing-to-much-money-and-are-simply-trying-to-cover-some-of-their-losses-fee”.  This pricing hit affected everyone who was granted a conforming loan over the past 2 years.  It may have been in closing costs, or in rate, but it was there, and it was across the board.

As of April 1st, 2011, the risk-based pricing matrix is expanding again, and what was once considered GOOD,  might now be considered high-risk.

For example, a borrower could have an 800 credit score, and have 20% down payment, and this is suddenly risky?  What once had no pricing adjustment now has a charge of .25% of the loan amount.  A loan amount of $300,000 would have added closing costs of $750, or perhaps a rate that is .125% higher, adding to the overall finance charges over the life of the loan.

It is interesting that a 680 credit score was once considered excellent.  Now, you can see that it would carry added closing costs of 1.75%, or $5250 on that $300,000.00 loan (or a rate that might be .25 – .375% higher.)

 Most of the new pricing adjustments are for an extra .25% in costs, across the board.

So, what does this mean? 

If a lender doesn’t sell the servicing to a mortgage, does that mean these fees don’t apply?

Unfortunately, most banks, whether small community banks or larger regional banks, underwrite to Fannie Mae and Freddie Mac standards, and they may sell these loans even though they keep the servicing.  It something that happens behind the scenes, and the borrower may not even realize it.  That will be a good topic to cover in another “Get Inside” video.  Basically, unless the loan is specifically a portfolio loan, also known as an in-house mortgage (and the rates on these types of loans are typically higher anyway), these pricing adjustments will apply.

Are there any ways to avoid paying these risk-based premiums?  Yes! 

A 15 year mortgage, or shorter, term is exempt from these new price adjustments.  Having a higher credit score, and a downpayment of 25% (or equity in the property if it is a refinance, of 25% or more) could be exempt from this new round of “what is a higher-risk loan”. 

A FannieMae Refi plus, and the FreddieMac Relief refinances are not being assessed these extra fees.  Not all the banks are offering these programs, but MDI Mortgage has access to these special, low cost loan programs and we have successfully negotiated some very favorable loan terms for our clients over the past few years.

There may be other options available for your unique situation, as well.  When you contact MDI Mortgage for advice regarding your mortgage financing, we investigate the many different loan options and choices, and present all the information needed in an easy to understand format so that you can be sure that you are making the very best decision, for you.

For more details about this change, contact me — I’m happy to help.”

Sherri Dyer, Advisor & Mortgage Maven

writing for MDI Mortgage, a full service mortgage company located in Bar Harbor, Maine, Mount Desert island

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Entry filed under: Educational Video, Fannie Mae, Freddie Mac, MDI Mortgage, Mortgage News, Rates, Sherri Dyer. Tags: , , , , , , .

The Reinvention of Fannie Mae and Freddie Mac

1 Comment Add your own

  • […] Although this can be done by yourself, I would highly recommend that you speak with a knowledgeable mortgage advisor before doing this, especially if you are in the process of being approved for a mortgage loan.  There are some items on credit reports which, if changed, could have a negative impact on your score.  A difference in credit score could have a significant impact on the rates and terms you are being offered.  (See posting about What’s Happening With Risk-Based Pricing here) […]

    Reply

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