New Fee Matrix Drives Mortgage Rates Higher Comparatively Speaking

In an earlier article entitled "Fed Rate Cuts Don't Necessary Mean Lower Mortgage Rates" I answered the question "what are mortgage rates based on?" and that answer, in short, is mortgage-backed securities.

This article is intended to introduce you to a new factor that will affect interest rates and that is the risk-based loan-level pricing adjustment matrix. If you think this isn't important and that it won't affect you, think again!

In December 2007 Fannie Mae & Freddie Mac introduced a new fee called the "adverse market fee", which added 1/4 point (0.25%) fee to all Fannie Mae & Freddie Mac loan products. That means that a zero point loan just became a 1/4 point loan and translates to an extra $1,000 in fee for a $400,000 loan. Not long after they came out with the adverse market fee they introduced the risk-based loan-level pricing adjustment matrix.

You are probably thinking who is Fannie Mae & Freddie Mac and how does this affect me? They are quasi-government agencies that purchase conventional mortgage loans on the secondary mortgage market in order to provide liquidity to lenders so they can make more loans. Since Fannie Mae & Freddie Mac buy the loans it stands to reason that they get to make the rules.

The following matrix only applies to those loans purchased by Fannie Mae & Freddie Mac although the few investors that remain that don't sell their loans to Fannie Mae & Freddie Mac follow a similar, if not the same, matrix.

In order to read the matrix simply find the intersection of your credit score range and loan-to-value range, which is your current loan balance divided by your current home value. The number in the box at that intersection is the mandatory fee that Fannie Mae & Freddie Mac adds to the standard pricing schedule.

The fee is calculated as follows:

(Loan Size x Price Adjustment)/100 = (Mandatory Fee)

For example: ($400,000 x 1.25)/100 = $5,000

The good news is the mandatory fee doesn't have to be paid out of your pocket. Besides the fact that most lenders will allow you to finance the fee, provided you have enough equity to do so, most mortgage lenders will trade 1 point (1.000%) in fee for a 1/4 point (0.250%) in interest rate. This means that if your interest rate is 6.00% and the mandatory fee is 1 point, you can accept a 6.250% interest rate and skip the loan-level pricing adjustment in its entirety. These added fees are making mortgages vastly more expensive or interest rates dramatically higher for lower credit score borrowers.

There is a similar matrix that applies to cash out refinance loans and is in addition to the above-mentioned matrix.


In order to read the matrix simply find the intersection of your credit score range and loan-to-value range. The number in the box at that intersection is the mandatory fee that Fannie Mae & Freddie Mac adds to the standard pricing schedule.

These new fee schedules have been added to mitigate the increased risk Fannie Mae & Freddie Mac are subject to as a result of the current lending environment and, quite frankly, it's only going to get more difficult. I expect new, more stringent, rules to come out regarding condominiums, as they already have gotten more stringent for 2-4 units. So, if you have considered restructuring your mortgage I would suggest you begin the process sooner instead of later because you may find it very difficult or impossible to refinance going forward.

For an excellent explanation of how this situation developed I have included the following 5-minute video clip created by a mentor of mine. If you take the time to watch it you will understand what actually occurred to get us to where we are today.

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