Think of them as backroom surcharges that increase what you pay when you get a conventional home mortgage. They can also kill your loan application and make purchasing a house or condo much more difficult.
Although you’ve probably never heard of LLPAs or G-fees — they’ve got eye-glazing names and aren’t always explained by loan officers — they are important. They can raise your interest rate, costing you thousands of dollars extra because of the size of your down payment, the type of property you’re buying and your credit score. And you had no idea.
LLPA is short for “loan-level price adjustment.” G-fee stands for “guarantee fee.” Both types of charges are levied by federally chartered mega investors Fannie Mae and Freddie Mac, the dominant players in the mortgage market. Although the mechanics and purposes of the fees differ, the basic fact is this: You pay them either through an interest-rate increase that continues for the life of the loan, or you hand over extra money at closing.
To Fannie and Freddie, these extra charges are needed to cover the costs they incur providing funds to the mortgage market. In the case of the pricing adjustments, they represent extra compensation for the perceived added risks that you as a borrower present to them.
In general, people with FICO scores below 740 get hit with add-on fees, as do borrowers with down payments of less than 40 percent, as well as all condo buyers. Make a 25 percent down payment with a 719 FICO score, and you pay a price adjustment of one percentage point.
But a national coalition of 25 housing, consumer, civil rights and mortgage groups is blowing the whistle on Fannie and Freddie, accusing them of gouging the public. In a letter to the companies’ federal regulator, the groups charge that despite huge improvements in underwriting standards and a sharp reduction in borrower defaults, Fannie’s and Freddie’s surcharges continue to be “excessive” and are driving “many qualified borrowers” away from conventional home loans.
G-fees have more than doubled in recent years, the groups note in their letter. Loan-level price adjustments remain “punitively high” — they punish borrowers — according to an independent analysis by Compass Point Research & Trading, an investment advisory firm. Based on the statistical risks of default, critics charge, Fannie and Freddie are squeezing way too much money out of consumers who pose minimal risk.
So what do these add-on fees amount to? Here’s an example using data provided by mortgage and housing groups:
Say you’re a millennial who is first-time buyer and you want to purchase a $200,000 house with a 5 percent down payment. Your mortgage amount is $190,000. You’ve got more than adequate income. But like many of your fellow millennials, you’ve got a middling FICO score of 660.
Because of your score and your modest down payment, Fannie and Freddie will charge you an additional $4,275. You can either pay this at closing — not likely — or add roughly half a percentage point to your loan’s interest rate. Over the first 60 months, the higher interest payments will cost you an extra $3,000. Over the full term of the mortgage, the add-on will total around $18,000. All of this is on top of the G-fees (again, about half a percentage point) and substantial private mortgage insurance premiums that Fannie and Freddie require to further limit their risk.
If you’re trying to buy a condo, things can get much worse. Fannie and Freddie see condos as riskier than other types of housing, and they whack all condos with a flat three-quarters of 1 percent extra fee on top of other surcharges keyed to credit score and down payment. Paul Skeens, president of Colonial Mortgage Group, calculates that with a 660 FICO, you’d pay $5,910 more on a low-down-payment $375,000 condo purchase than a buyer with a 740 score.
The coalition believes the current fee levels are unjustifiably high and are hampering home ownership opportunities for first-timers, moderate-income buyers and minority applicants with good but not excellent credit. “No borrower should face arbitrarily high prices for mortgage credit,” the groups say in their letter.
Will Fannie and Freddie make changes? Their chief regulator, Mel Watt, director of the Federal Housing Finance Agency, has the power to order them to do so. But all his office would tell me is “We have received the letter and will respond.”
A lot of folks will be waiting for the answer.