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Loan-Level Price Adjustments (LLPAs) are risk-based pricing adjustments applied to mortgage interest rates based on specific loan and borrower characteristics. These adjustments reflect the increased or decreased risk associated with particular loan attributes, allowing lenders and investors to price loans more accurately based on their likelihood of default or prepayment. LLPAs are established by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, as well as private investors, to align loan pricing with risk. They can either increase the loan’s cost (positive adjustments) for higher-risk characteristics or decrease it (negative adjustments) for lower-risk characteristics. The adjustments are typically expressed in basis points, where one basis point equals 0.01% of the loan amount, or as points, where one point equals 1% of the loan amount.

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How LLPAs work

LLPAs are applied based on multiple risk factors that have been statistically correlated with loan performance. Credit score is one of the most significant factors, with lower credit scores triggering substantial positive adjustments that increase the loan’s cost. LTV ratio is equally important, as higher LTV ratios indicate less borrower equity and greater lender exposure, resulting in higher adjustments. Loan purpose also influences LLPAs, with cash-out refinances typically carrying higher adjustments than rate-and-term refinances because borrowers extracting equity may have different financial motivations and risk profiles. Property type and occupancy status significantly impact adjustments, as investment properties and second homes have historically shown different default patterns than primary residences. Loan amount can trigger different adjustment structures, with jumbo loans often following separate pricing grids. These adjustments are cumulative, meaning multiple factors can combine to create substantial pricing impacts. For example, a borrower with a 680 credit score, 85% LTV, and an investment property might face adjustments totaling 2.0% or more, significantly increasing the loan’s cost compared to a borrower with a 760 credit score, 70% LTV, and a primary residence.

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LLPA examples

FactorAdjustment
Credit score 680-699, LTV 80%+0.75% (75 basis points)
Credit score 720+, LTV 60%-0.25% (25 basis points)
Cash-out refinance+0.50% (50 basis points)
Investment property+0.75% (75 basis points)

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LLPA cliffs and optimization

LLPAs often exhibit “cliff” effects where crossing specific thresholds triggers disproportionate adjustments. For example, a loan at exactly 80.00% LTV may face significantly higher adjustments than a loan at 79.99% LTV, even though the difference is minimal. These cliffs can create substantial cost differences for borrowers and highlight the importance of precise loan structuring. Pylon’s optimization engine specifically addresses these cliffs by evaluating thousands of loan structure permutations to identify structures that avoid these costly thresholds while still meeting borrower objectives. By treating all borrower dollars as fungible across down payment, points, closing costs, and other uses, the optimizer can reallocate funds to find optimal structures that minimize total cost while avoiding LLPA cliffs.