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About the LLPA and the AMDC

Adam Rust's picture

Posted May 25, 2010

Where is the outrage over LLPA and AMDC, the GSE guidelines that have placed additional costs on mortgages that are purchased on the secondary market by the agencies?

The Loan Level Pricing Adjustment (LLPA) imposes charges, ranging from 25 basis points to 200 basis points, for mortgages that have higher risk characteristics.  Those categories include

loans with stated income features, investor loans, loans on multifamily units, and loans where borrowers have lower credit scores.

The Adverse Markets Delivery Charge (AMDC) fixes an additional cost on mortgages that are made in areas where real estate values have declined sharply. The application of the charge is analysed at the MSA level. That's good, because it would be particularly onerous if it was applied with more granularity. Imagine what would happen if the GSEs were willing to buy loans on one side of the tracks at one price, but at a higher price on "the other side of the tracks." We would be back to redlining.

For a period, it appeared that FHA would not accept this pricing on its loans. That hinted at a major problem for private mortgage insurers. After all, this would have pushed more and more loans to FHA.

If the demand on the secondary market returned to a state where private buyers were interested, then this could become interesting again. Again, though, this seems to create a force that would prevent that. Imagine if the private buyers were back. Then, they'd be likely to get a greater share of mortgages made to borrowers with less than perfect credit. They would also be more attractive to investors, to multifamily buyers, and to people with ARMs or with stated-income loans. That's not an attractive prospect.

Demand for mortgages, particular for mortgages on loans that are used to buy homes, is weak. The expiration of the first-time homebuyer tax credit prompted a lot of activity for lower-priced homes. That incentive is gone, now, and for homes that remain the prospects of sales are much weaker. Interest rates are very low, but down payment requirements make a big difference.