Pricing exceptions are widespread in mortgage — and so are the regulatory risks

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MBA urges removal of DTI-based LLPA

Monthly income, debt payments often change during the loan process and will be difficult to provide an accurate rate to borrowers: MBA

The Mortgage Bankers Association (MBA) urged the Federal Housing Finance Agency (FHFA) to remove the addition of a debt-to-income loan level pricing adjustment (LLPA) in Fannie Mae and Freddie Mac‘s pricing framework.

In January, the FHFA made a series of changes to LLPA fees with a revamped LLPA matrix that differentiates pricing by loan purpose, with grids for purchase loans, limited cash-out refi loans, cash-out refinance loans. Such changes prompted pushback from the National Association of Realtors and the MBA that it could hurt middle-wealth homebuyers and increase overall pricing. 

“The timing of these changes is especially troubling given current stressed housing market conditions already making affordability a challenge, and the fast-approaching peak homebuying season,” Bob Broeksmit, president and chief executive officer of MBA, said in a letter sent to FHFA director Sandra Thompson on Friday. 

Included in the litany of pricing changes, which are to take effect on May 1, was a new pricing adjustment for borrowers with a DTI ratio above 40%. This particular LLPA has caused upset in the mortgage industry.

Broeksmit said that the DTI ratio is not a strong indicator of a borrower’s ability to repay as noted by the revised definition of the general qualified mortgage. The letter also raises concerns regarding operational issues and quality control for lenders for a LLPA tied to DTI ratio.

“A borrower’s income and expenses can change several times throughout the loan application and underwriting process, especially considering evolving assumptions concerning the nature of debt and income, and the growth in self-employment, part-time employment, and “gig economy” employment,” Brokesmit said.

Changes in income and expenses can cause the DTI ratio to fluctuate as items of income and expense disclosed during the application process are later verified during underwriting, he noted. 

Multiple changes to a borrower’s loan pricing could occur during the underwriting process, which may result in difficult compliance challenges as lenders are forced to evaluate when such changes constitute a valid change in circumstance under TILA-RESPA Integrated Disclosure (TRID) — potentially requiring redisclosures and delays in the closing process.

Problems with post-closing quality control activities could also be an issue, the letter noted.

Citing data from Fannie Mae and Freddie Mac, the MBA said lenders are facing “a rising number” of repurchase requests from the GSEs, the majority of which are related to income calculations.

“The addition of a hard DTI pricing threshold could increase the frequency of “defects” for minor calculation changes in the DTI ratio,” Broeksmit said. 

Going forward, Brokesmit suggests the FHFA partner with the MBA to convene a small group of lenders to fully examine the difficulties of implementing a DTI-based LLPA. 

Through a partnership, the MBA hopes to find “alternative approaches” to mitigating Fannie Mae and Freddie Mac’s exposure to high DTI ratios that do not cause hardships to both lenders and borrowers.

The new changes on the LLPA fees will hit middle-wealth homebuyers as fees are raised on some borrowers with good credit scores and moderate down payments, the National Association of Realtors said on the heels of FHFA’s announcement in January.

“Now is not the the time to raise fees on homebuyers” in the wake of a three-percentage increase in mortgage rates, the NAR said, adding the FHFA needs do address its recent increase in fees on homebuyers in high-cost markets as well as guarantee fees that impact all homebuyers.

LOs brought up concerns surrounding fairness against lower risk borrowers with higher credit scores and larger down payments. “[They] are now going to be penalized and essentially forced to subsidize borrowers who haven’t saved money and are actually much higher risk,” one LO in Oregon told HousingWire. 

“This pricing change is less than ideal. Makes it more expensive for most borrowers and more complex to manage for lenders. Unlikely to increase satisfaction levels for customers,” a branch manager in Texas said. 

Thompson said the changes will strengthen the “safety and soundness” of Fannie Mae and Freddie Mac by “enhancing their ability to improve their capital position over time.” 

“These targeted pricing changes will allow the Enterprises to better achieve their mission of facilitating equitable and sustainable access to homeownership, while improving their regulatory capital position over time,” Thompson said. 

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