President Donald Trump wants to reduce short-term and long-term interest rates.
You’re probably wondering how a president can do that while not stepping over the Federal Reserve.
First, let’s consider short-term interest rates. With the inflation rate still at 3%, Federal Reserve Chairman Jerome Powell isn’t going to lower the short-term Federal Funds rate anytime soon.
The Fed’s target rate is 2%. The fed funds rate directly affects what the Prime Rate is. Today, the prime rate is 7.5%. This matters because home equity lines-of-credit are tied to prime.
Trump can’t force Powell to reduce rates, nor can he fire him. So, for now, we’re out of luck with short-term rates dropping.
Let’s turn to long-term interest rates.
Trump could order the Treasury Department to start buying mortgage-backed securities, like when the Federal Reserve bought roughly $1.45 trillion of MBSs during the Great Recession. That was popularly known as quantitative easing. Buying MBS can reduce mortgage rates by increasing competition and increasing mortgage market liquidity.
The Federal Reserve was able to effectively print money during the mortgage meltdown days.
The down side: Treasury would have to borrow money, which would increase the federal debt, according to Ted Tozer, former Ginnie Mae president under President Barack Obama.
“Increasing the debt is inflationary,” he said.
One sure-fire way to reduce interest rates is to get rid of the hidden (to consumers) mortgage fee or mortgage tax charged by Fannie Mae and Freddie Mac and known as a loan level pricing adjustment or LLPA.
Trump could mandate through an executive order for the Federal Housing Finance Agency (Fannie and Freddie’s regulator and conservator) to eliminate the LLPA. Or FHFA could do this on its own.
“It will be interesting to see how the new FHFA approaches the loan level charges imposed by the government agencies FNMA and Freddie Mac,” said Brad Seibel, chief investment officer, Sage Home Loans.
Seibel described the LLPA as “direct loan costs” that are passed from the lender to the consumer, significantly affecting lower-FICO score and lower down-payment borrowers.
“Hopefully we will see some relief from these charges that drive up the cost of homeownership for so many,” he told me.
The FHFA did not respond to my query regarding any intentions to drop the LLPAs.
What is an LLPA?
This fee is charged to borrowers who take out conventional mortgages from the likes of Fannie Mae and Freddie Mac.
Essentially, it is a risk charge that determines how much extra a borrower pays, for depending on various factors such as the lowest middle FICO credit score of all borrowers, loan-to-value, property type, purchase or refinance, cash-out refinance, occupancy type and number of units. The one-time fee comes at loan origination whether it’s a purchase or refinance loan.
For example, let’s say you were a well-qualified buyer buying an owner-occupied condo for $1 million, putting 20% down. Your middle FICO score is 740. Your LLPA amounts to 1.625% of the loan amount. If you took that hit in dollars it would be $13,000. If you take that risk-based pricing hit by converting the cost to a higher rate you would go from 6.625% to 7.25% for a 30-year fixed. That’s a 0.625% rate increase.
I’ll note that borrowers usually take the rate hit, rather than paying the LLPA up front.
Principal and interest payment at 6.625% is $5,122. At 7.25% your principal and interest payment would be $5,457. The LLPA drives up the monthly payment by $335. That is $13,000 or $335 x 360 months, equal to $120,600. In this one simple example you can knock the rate down by 0.625 if LLPA are eliminated. LLPA can be much more expensive than the example above I provided. For example, second homes and investment properties can take a 4.25% rate hit.
So, where is today’s risk for Fannie and Fred? Few borrowers are in financial trouble.
The mortgage payment delinquency rate in the last quarter of 2024 was 3.98%, according to the Mortgage Bankers Association. As of January 2025, the foreclosure rate was 0.23%, according to Statista.
How did LLPAs come about?
Fannie and Freddie started using LLPAs following the 2008 mortgage meltdown, helping to mitigate risk and increase capital for the mortgage giants.
After the meltdown, regulators and Congress via Dodd-Frank tightened regulations on lenders offering risky loan programs. That’s why today’s loans perform so well — there’s a lot more underwriting rigor before a loan is funded.
What came before the LLPA?
The mortgage industry used risk-based pricing like credit scores and loan-to-value. It was a simpler matrix without the detailed calculations and adjustments provided by LLPAs.
Eliminating the LLPA would be a godsend for borrowers wanting to refinance. Purchase borrowers will also benefit from the lower rates, but home price spikes are likely with the increased borrowing power.
Freddie Mac rates
The 30-year fixed rate averaged 6.76%, 9 basis points lower than last week. The 15-year fixed rate averaged 5.94%, 10 basis points lower than last week.
The Mortgage Bankers Association reported a 1.2% mortgage application decrease compared with one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $97 more than this week’s payment of $5,236.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.5%, a 15-year conventional at 5.375%, a 30-year conventional at 5.99%, a 15-year conventional-high balance at 5.75% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year high balance conventional at 6.5% and a jumbo 30-year fixed at 6.375%.
Eye-catcher loan program of the week: A 30-year mortgage, with 30% down locked for the first 5 years at 5.75% with 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.