Second Home/High Balance Mortgage Costs Rise
Fannie Mae and Freddie Mac, the government sponsored enterprises (GSE’s) that guarantee most US mortgages, announced substantial increases in the fees (aka Loan Level Pricing Adjustments or LLPAs) they charge on second home and “high balance” mortgages Wednesday. (HERE and HERE). The new costs are effective for loans securitized on/after April 1, meaning borrowers will see them added within weeks (even for loans closing well before April 1!).
The largest impact is to loans for second/vacation homes. Just how much will the changes cost buyers? Previously, there were no separate 2nd home pricing adjustments for our scenario, today’s announcement means these loans will soon carry a hefty 1.125 to 4.125% pricing adjustment!
The irony here is that Fannie/Freddie instituted caps on investment property/2nd home loans last spring, limiting them to 7% of the loans they purchased. Those caps drove rates on rental/2nd home loans up dramatically for several months before the agencies removed them in September, a move cheered by buyers/realtors/lenders. Today’s announcements put 2nd home mortgages effectively in the same pricing range as investment property loans, albeit with slightly lower adjustments for down payments of 30%+. LLPAs ostensibly account for loans’ varying default risk, including factors such as credit scores, equity, loan purpose, and property type. Effectively stating (by charging almost identical LLPAs) that 2nd homes have similar default risk to investment properties is quite a change, given that until now, 2nd home loans were priced similarly to those on primary residences.
While not as dramatic of change, Fannie/Freddie also raised their LLPAs on “High Balance” mortgages (those exceeding the conforming limit of $647,200 for a single-family residence). High balance loans are available in designated high-cost metro areas. Fees on high balance loans are increasing by .25% to .75% in most cases, with cash out refinances rising an additional .75%. The GSEs made a point of noting that the higher fees would not apply to borrowers with incomes under their area’s median incomes, but borrowers in that income range typically don’t obtain high balance loans.
The bottom line? A high balance loan borrower might/might not notice slightly higher closing costs, but 2nd home buyers will almost certainly notice them. Want to avoid the new costs? The time to act is now, the increases will be impacting loan pricing in weeks, not just starting April 1. Sadly, this is NOT an early April Fools’ joke.