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Loan Level Price Adjustments and Credit Score Improvement: The Hidden Revenue Growth Tool
What are Loan Level Price Adjustments?
Loan Level Price Adjustments (LLPAs) were introduced by Freddie Mac and Fannie Mae almost 15 years ago. They have been around so long they are de rigueur; all mortgage lenders factor LLPAs into mortgage rates every day. LLPAs are fees charged by lenders to borrowers to compensate for risks associated with the loan. These fees vary based on factors such as credit score, loan-to-value ratio, and property type.
Think about loan level price adjustments as you would insurance premiums, say, on your car. Riskier drivers pay higher premiums; safer drivers pay lower premiums. So it is with mortgage loans. Fannie Mae and Freddie Mac collect LLPA premiums based on every individual loan’s characteristics. The higher the risk, the higher the LLPA premium. It’s really that straightforward.
And while Loan Level Price Adjustments are ‘set in stone’ based on a particular loan’s characteristics, there is one characteristic that borrowers and lenders can improve during the mortgage process, and, therefore, reduce the LLPA on that particular loan. That characteristic: the credit score.
The LLPA Matrices consist of a series of tables of surcharges based on individual loan characteristics. There are many layers of risk that the GSEs consider, but for the purposes of this paper we will be focusing on LTV and borrower credit score. LLPAs apply to all loans, based on the LTV and credit score characteristics. There are ten other characteristics that may or may not apply, depending upon the particular loan.
Learn more about LLPAs in our white paper: The Importance of Considering Consumer Credit When Predicting Lender Profitability
What do we know about credit score improvement?
First, approximately 2/3 of all borrowers in all credit bands can improve their credit score by at least one 20-point credit score band. We know this because we have analyzed more than one billion credit reports over the past two decades.
The second thing we know is that more than 65% of borrowers WERE NOT offered the opportunity to improve their credit score during the mortgage process. This came through loud and clear during research that CreditXpert conducted in December of 2022 with recent mortgage borrowers and prospective home buyers.
The third thing we know from our recently completed consumer research is that 70% of the borrowers who can improve their credit score will take the actions necessary to do so. They will do this because they believe it helps them achieve better home financing options: lower rates and fees, more and different loan programs.
What are the other loan characteristics used in the ‘insurance premium calculation’?
The other primary loan characteristics are used to calculate the ‘insurance premium’ is loan-to-value (LTV). In addition to Credit Score and LTV, other loan characteristics like number of units, second or investment homes and type of property may impact LLPA premiums. The important thing to note here is that LLPAs are cumulative. A single loan could have multiple characteristics that figure into the LLPA for that loan.
The credit score stands alone in that it can, unlike all other LLPA characteristics, be improved during the mortgage process. Making sure borrowers are aware of the opportunity to improve their credit score, and that they take the actions necessary to do so, means a lower LLPA premium on their loan.
How much lower? Studying the main credit score / LTV table reveals, generally, a 25-basis point decrease in premium for a 20-point increase in credit score. On a loan of When you multiply savings like these across a portfolio of loans, things really start to add up!
We call this revenue strategy a hidden winner because it’s been hiding under the bright cover of daylight since the dawn of Loan Level Price Adjustments. It works right now, when lenders need it most; enhancing revenue has never been more important.
We know that a Credit First strategy, where credit score improvement is offered to every eligible borrower, is a true hidden winner, one that will enhance every lender’s bottom line as well as help offer borrowers a better, more competitive rate. The math is simple. So is credit score improvement thanks to CreditXpert’s time-tested, data-centric approach.
Interested in learning more? Click here to schedule time with our Product Specialist.
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While wrapping our heads around the state of the mortgage market and where it’s headed this year, we wanted to check in on rates and the impact credit scores have on them. We first noticed in September 2022 that lenders were not passing along the advantage higher credit scores afford lenders vis a vis the Fannie Mae/Freddie Mac loan level price adjustments (LLPA).