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Conforming loans will be more expensive in 2014

 

If you're planning on getting a mortgage in 2014, it'll be better to do it sooner than later.

Fannie Mae and Freddie Mac are making changes to the way loans are priced, and the net result will be higher costs for all borrowers. 

Remove one fee, add another

This comes on the heels of a reduction in costs in 46 states, as the Adverse Market Delivery Charge (AMDC), a 0.25 percent fee imposed on all mortgages, is being eliminated everywhere except states where foreclosure costs are exorbitant:

  • New York
  • New Jersey
  • Florida
  • Connecticut

Not surprisingly, these are "judicial" states, where it is taking three years or more for a lender to take control of a property where a borrower has failed.

More and different fees come into play

Increases in "risk based premiums" -- known in the industry as "loan level pricing adjustments" -- will more than offset the disappearance of the AMDC.

Futhermore, more and different fees will apply to borrowers as Fannie and Freddie have expanded the number of "credit buckets" to which fees will apply.

Triple the cost

For example, a loan presently being written to any borrower with a FICO score above 740 and a 20 percent down payment (or equity stake) will see a 0.25 percent AMDC and a 0.25 percent LLPA, for a total of a half-point fee. For a $100,000 loan, that translates in to $500 in cash, or if incorporated into the rate, about a 0.125 percent increase.

After April 1, 2014 the same borrower will no longer see a 0.25 percent AMDC. The same borrower -- now with a FICO above 740 but below 759 -- would face a fee of 1.5 percent. This would either triple the cash total ($1500 in cash) or raise the interest rate by about 0.375 percent.

The breakdown

A higher credit score doesn't bring much relief, either. Borrowers with a 20 percent down payment and a FICO between 760 and 779 will see a one percent fee, and those with a score above 780 will face a 0.75 percent fee.

You'll only be able to escape these add-ons if you can put 40 percent or more down and have a FICO of 700 or above.

Here are some common costs to compare using the old fee structure and the new (old includes the AMDC):

FICO Score

LTV--Percent

Old Fee Total

New Fee Total

>=800      

95%

0.50%

0.75%

>=800      

90%

0.50%

0.75%

>=800      

85%

0.50%

0.75%

>=800      

80%

0.50%

0.50%

 

FICO Score

LTV--Percent

Old Fee Total

New Fee Total

780-799    

95%

0.50%

0.75%

780-799    

90%

0.50%

0.75%

780-799    

85%

0.50%

0.75%

780-799    

80%

0.50%

0.50%

 

FICO Score

LTV--Percent

Old Fee Total

New Fee Total

760-779    

95%

0.50%

1.00%

760-779    

90%

0.50%

1.00%

760-779    

85%

0.50%

1.00%

760-779    

80%

0.50%

0.75%

 

FICO Score

LTV--Percent

Old Fee Total

New Fee Total

740-759    

95%

0.50%

1.50%

740-759    

90%

0.50%

1.50%

740-759    

85%

0.50%

1.50%

740-759    

80%

0.50%

0.75%

 

FICO Score

LTV--Percent

Old Fee Total

New Fee Total

720-739    

95%

0.75%

2.00%

720-739    

90%

0.75%

2.00%

720-739    

85%

0.75%

1.50%

720-739      

80%

0.75%

1.25%

(source: https://www.fanniemae.com/content/pricing/llpa-matrix.pdf)

These fees will apply to loans sold to Fannie Mae or Freddie Mac on or after April 1, 2014. However, it is to be expected that these will start to show up in the market as early as 60 days before (or perhaps more) as it can take an extended period of time to get a loan to close today. This time may be lengthened somewhat by the implementation of Ability-to-Repay rules, new documentation requirements and more.

The upshot …

The upshot is that a mortgage taken early in 2014 is likely to cost a lot less than one taken later in the year.

About the author:
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.

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