It's becoming tougher and tougher to get accurate rate quotes online these days. But not because of bait-and-switch tactics or other nefarious bank tricks. It's because of a government-led pricing scheme called loan-level pricing adjustments (LLPAs).
LLPAs can add up to 3 percent to any online advertised rate. They've been in effect since December 2007, and have become progressively more punishing over time.
The government learns from auto insurers
The easiest way to understand LLPAs is to think of the government as a mortgage market "middle man"; an entity between the mortgage bond market and you.
Indeed, this is how Fannie Mae and Freddie Mac are defined in their respective charters. The groups were formed to be financial conduits between everyday homeowners--like you and me--and the multi-trillion dollar mortgage-backed securities market.
The groups play an important secondary role, too. Fannie and Freddie guarantee that mortgage bond holders get repaid on their investments--regardless of whether underlying homeowners are current with their mortgage(s).
This guarantee is why LLPAs exist at all.
See, through 2006 and 2007, loan defaults increased while home values fell. Fewer homeowners paid on their mortgages. Fannie and Freddie's respective reserve funds shrank to dangerously-low levels. Without reserves, of course, the entities would fail to meet their charter obligations and would be, in a word, insolvent.
The government had to think differently. It took its cue from auto insurers.
The government: new mortgage middle man
In the world of auto insurance, "riskier" car owners pay higher rates for insurance. The sports car pays more than the minivan; the street-parker pays more than the garage-parker; and the low deductible pays more than the high deductible.
Instinctively, this makes sense. The same concept applies in the world of mortgages. The more risk that you--as an individual--represent to Fannie Mae or Freddie Mac, the more you will pay for your mortgage.
LLPAs are made against a multitude of loan traits. For example:
- Smaller down payments pay more than larger down payments
- Lower FICO scores pay more than higher FICO scores
- Mortgages for investments pay more than mortgages for primary residences
- Multi-unit homes pay more than 1-unit homes
In addition, owners of condominiums may pay more than owners of single-family homes, as well as homeowners with subordinate financing.
In all, there are eight categories of risk and the government up-charges for all of them. You can see the up-charges first-hand via this LLPA calculator.
You can't "ballpark" mortgage rates anymore
Thanks to LLPAs, mortgage rates are no longer one-size-fits-all. The rate available to you is different from the rate available to your neighbor, and different from anyone else you know, too. Calculating your personal mortgage rate requires a cross-reference on the official LLPA table.
It's why your mortgage lender can't "ballpark" a mortgage rate for you. For the last three and one-half years, there have been too many variables that can change your price.
It also means that advertised mortgage rates should be treated more as a starting point, and not a conclusion. Only after submitting a complete loan application will you know what mortgage rate you actually qualify at.
Dan Green is a loan officer with Waterstone Mortgage in Cincinnati, Ohio, and the author of the nationally recognized mortgage blog, TheMortgageReports.com. Dan serves the purchase and refinance needs of his clients, and speaks to national audiences about the mortgage market. Follow him on Twitter at @mortgagereports.