Most, but not all, mortgages are funneled through the Federal National Mortgage Association (FNMA, or “Fannie Mae”) or through the Federal Home Loan Mortgage Corp. (FHLMC, or “Freddie Mac”) as a part of the secondary mortgage market. Collectively Fannie Mae and Freddie Mac are often referred to as the “Government Sponsored Enterprises” or “GSEs.” Banks lend out to buyers and investors, and if the bank wants to keep lending, they need somebody to infuse more money into the system. Enter the GSEs that purchases mortgages off the banks to refill the bank’s coffers and allow the bank to continue lending. This was designed as a way to stimulate housing markets by increasing the amount of low to moderate income loans available in the market. The GSEs don’t just purchase any old loan though, they have strict guidelines for what gets purchased — Fannie Mae has 1,200 pages of guidelines. Lenders that want to continue benefitting from liquidity and heightened ability to lend out mortgages, those lenders need to follow those guidelines and “conform” to the GSEs demands. It’s estimated that near 70% of all mortgages are supported by Fannie Mae and Freddie Mac.
Of particular interest to brokers is a concept in the the GSE lending guidelines called “Interested Party Contributions,” or “IPCs.” An IPC is any cost that would normally be the responsibility of the purchaser, but is instead paid directly or indirectly by someone else involved in the sale. Concessions, seller payments, seller “gifts” to the Buyer, all are considered IPCs.
The GSEs restrict the amount of IPC that can be brought into a mortgage transaction, as does the Federal Housing Administration (FHA) and the Veteran’s Administration (VA). Depending on the Combined Loan to Value ratio, the IPC limits can be quite restrictive.
- CLTV of 90%+ [Buyer down payment is 10% or less] : Maximum IPC is 3%
- CLTV of 75.01%-90%: Maximum IPC is 6%.
- CLTV of 75% or less: Maximum IPC is 9%.
- Investment Property: Maximum IPC is 2%.
- FHA Loan: Maximum IPC is 6% of lesser of purchase price or appraised value
- VA Loan: Maximum IPC is 4%, but additional restrictions apply.
As a simple baseline, it makes sense to put down limits. If I sell you my house for $1 million, but rebate you $900,000; only $100,000 exchanged hands, but on paper the property looks like it sold for a million dollars. That sort of money laundering is ill advised and can form the basis of several types of fraud.
The question on everyone’s mind after the recent NAR settlement is whether off-MLS cooperative compensation (payment from listing broker to buyer broker) and seller concessions for buyer broker commission are subject to the IPC limits. We are still waiting for clarity from the GSEs on this point.
Historically, cooperative compensation offers has not been counted against the IPC limits. The GSE guidelines say that “[f]unds paid by the property seller that are fees or costs customarily paid by the property seller according to local convention are not subject to the maximum financing concession…” That guideline is the reason why title insurance costs that benefit the buyer can be paid by the seller without it counting against IPCs.
NAR and the Mortgage Bankers Association have pressed the GSEs and FHA for confirmation that, going forward, cooperative compensation and seller concessions for buyer broker fees will not count against the IPC limits. So far, FHA has signaled that these payments will not count as IPCs and has published an FAQ on their website, but there has been no response from the GSEs.
For now, what that means is that we don’t have a clear answer and Buyers should always consult with their lender to understand what the IPC limits are, and whether contributions from listing agents or sellers to buyer broker fees (or any other contributions from interested parties) will count against them.
For ongoing updates on this topic from NAR, visit www.facts.realtor.