Fannie, Freddie To Raise Rates

Borrowers, get ready for higher interest rates on new conforming mortgages.

It’s no secret that rates have already risen as the outlook for the U.S. economy has brightened in recent weeks. But rates on some new home loans are also set to go up regardless of economic activity.

That’s because Fannie Mae and Freddie Mac, the two government-controlled entities that purchase mortgages from lenders, have announced new “loan-level price adjustments,” or LLPAs, which will jack up the “pricing,” aka rates, on certain new loans.

Fannie Mae’s new pricing, announced Dec. 23, 2010, is set to take effect April 1, while Freddie Mac’s new schedule will be effective March 1.

The price increases will be based on the borrower’s loan-to-value ratio and credit score, and even those who have a large down payment and score in the 700s will be affected. That might seem unfair, but the reality is that a price increase that affected only less-qualified borrowers wouldn’t accomplish much, since those borrowers by definition aren’t able to get a new loan.

The rate increases might not show up in the official measures of inflation, but they are, in fact, not unlike recent rises in prices for fuel and food in some respects. Borrowers won’t get anything extra, but will still pay more for the same product. The increases won’t be due to increased demand or manufacturers’ higher costs, but rather as a result of bad bets in the past and more perceived risk in the future. The profit motive is naturally at work as well.

By: Marcie Geffner

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