Final answer:
A Loan-Level Price Adjustment (LLPA) is a risk-based fee charged by GSEs for purchasing loans that show higher risks based on factors like credit scores, loan-to-value ratios, and property type. The fee results in higher interest rates for riskier loans to mitigate potential losses from defaults. Option B
Step-by-step explanation:
A loan-level price adjustment (LLPA) is a fee that government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac charge to acquire loans with certain characteristics that are perceived to carry higher risk. The correct answer to the student's question is B) GSE charges that result in higher interest rates when consumer eligibility or loan features present a higher risk of default.
A borrower with a poor credit history, such as one who has been consistently late on loan payments, is deemed less likely to repay a loan on time. This diminishes the loan's attractiveness and thus warrants a higher LLPA to offset the increased risk.
Additionally, market conditions like rising interest rates also influence pricing, as loans secured during periods of lower interest rates become less valuable. Conversely, if a borrower displays financial strength or if market interest rates have declined, the associated loan may be more desirable, potentially reducing LLPAs or even commanding premium pricing. option B