Mortgage News

Effective October 1, 2008, Fannie Mae is making home loans more expensive for Americans.  You may want to bookmark this page because where Fannie goes, Freddie often follows.

The first part of Fannie’s two-part change is a remodel on its risk-based fee structure, also known as loan-level pricing adjustments.  The original model was eighty-sixed after just 12 weeks.

To read the fee chart, locate the intersection of your credit score and mortgage loan-to-value.  The cross-section is your risk-based mortgage fee, as mandated by Fannie Mae, and represented by this formula:

Risk-based fees are relatively new to conforming borrowers; mortgage pricing was previously one-size-fits-all.  Today, however, not so much. 

20 different conforming borrowers might be offered 20 distinct mortgage rates and none of the them would be considered out-of-market.  It’s one reason why "ballparking" a mortgage rate is so darn tough these days.

But don’t be discouraged if the risk-based pricing model confuses you — it’s actually one with which we’re all pretty familiar.  Think auto insurance. 

With auto insurance, the cost of a policy increases as a driver’s perceived risk to the insurance company increases.  A "safe" profile, in other words, is rewarded with lower premium.

The same methodology applies to loan-level pricing adjustments and, in this sense, LLPAs are strangely fair — the highest risk borrowers are paying the highest costs.

Fannie Mae’s second pricing change, however, is not as democratic.

Across the board, Fannie Mae is doubling its Adverse Market Delivery Charge to 0.500 percent. 

This is a blanket fee that applies to all mortgages that Fannie Mae securitizes, regardless of credit score or loan-to-value.

Everyone pays.

Now, consider: This is the 3rd and 4th time since December 2007 that Fannie Mae stepped between Wall Street and Main Street to alter mortgage pricing. 

This is bad news because rates are supposed to be determined by the price of mortgage bonds alone.

Instead, rates are being set by the price of mortgage bonds plus whatever fees Fannie (or Freddie) tack on top.

And, so long as Fannie and Freddie project a growing number of mortgage defaults in their respective portfolios, we can expect that loan-level pricing adjustments will increase for a 5th and 6th time sometime before the New Year.

Watch this 5-minute video on the mortgage market and you’ll understand what I mean.  Guidelines are shrinking, costs are rising, and underwriting is a giant kludge.

So, why is now a good time to buy a home?  Because, all things equal, it’s going to be a heckuva lot more expensive and a lot more difficult to get it financed in the future.  Markets are still contracting, folks.  Fannie’s new fees are proof.

If you study mortgage rates long enough, you realize that "good mortgage rates" are under constant attack from a number of sources, including:

• World events and geopolitics
• U.S. employment data
• U.S. government and policy
• The price of oil and gasoline

And this is just a sampler. 

There are literally thousands of reasons why mortgage rates behave the way they do and it’s why there’s no perfect answer to the question everyone wants to asks:

"Do you think rates will be higher later this year?"

However!  One thing of which we’re certain is that the biggest threat to "good mortgage rates" is inflation.  When inflation pressures build, mortgage rates tend to build.  And, when inflation pressures fall, mortgage rates often fall.

This is because inflation erodes the value of the U.S. dollar which makes mortgage interest worth less to the bank that collects it.  The only way to compensate the bank for the diminishing value of its investment is to charge more interest. 

Hence, rates rise when inflation is present.

Earlier this summer, rising energy costs pushed inflation levels to their highest levels in many moons and mortgage rates followed.  Over the past 2 weeks, however, energy seems to be reversing its course. 

Since July 15, gas prices are down 17 cents per gallon nationwide.

Of course, you’ve probably noticed this already and don’t need me to point out the deeper implication, but when the cost of filling up your gas tank gets smaller, your personal Cost of Living gets smaller, too.  That’s a good thing because falling personal costs is the opposite of inflation and inflation is bad for mortgage rates.

Now, we can’t predict where interest rates will go tomorrow because too many rate-impacting factors are unpredictable.  Political events, for example.  But, we can watch some of the key indicators from everyday life and follow along at home.

Next time you fill your gas tank, take note of the gas price per gallon.  It’s not an exact rule, but if gas prices are falling, you can bet that mortgage rates are facing one less reason to go higher.

(Image courtesy: GasBuddy.com)