Risk Based Mortgage Pricing
Conventional mortgage loan approvals are quite often more difficult to obtain NOW because the monies used are based on private investments and the rates of returns from the secondary market an investor is likely to earn from these bundled loans once they are sold off from their portfolios. Risk Based Mortgage Pricing was done to protect the lenders and the borrowers from unprofessional originated files.
If the mortgage loan officer has simply taken the uniform residential loan application in the hopes that the loan can be thrown against the wall to see if it sticks and underwriting buys it, the loan officer’s closing percentage will probably not be as high as it should be. Lenders do NOT like to have their time wasted on poorly originated files. What that means to managers is that the processor’s time was wasted on a bad file when a bunch of decent files that could have closed sat in the processor’s pipeline.
How Risk Based Mortgage Pricing Is Evaluated
The risks that a decent loan officer needs to look at before taking the 1003 Uniform Residential Loan Application. (There are a few more)
- Credit (a full tri-merged credit report, not an in-file)
- Employment History (Does the income being reported match with the job title. In other words, if the borrower is working at McDonalds as a clerk, is he reporting he earns 100,000 dollars a year?)
- Banking History (Are there a lot of bounced checks, NSF fees, etc being reported by the bank)
- Mortgage/Rent payment history
- Debt Load (credit cards, other mortgages, automobile payments)
- Negative information from the state or federal government about the borrower
- Appraisals (Is the home in an area where there is a lot of foreclosure activity and is the home in good repair?)
- HMDA (Home Mortgage Disclosure Act) Information concerning bankruptcies, unpaid federal debts, child support, alimony, etc
The preceding list is a quick summary of what a loan officer should look at before originating full file for signature from the borrower. If one pictures a balance scale, with negative attributes of a file on one side and positive on the other, this is a good representation of how a lender views the loans in his pipeline.
If the positive attributes out weigh the negative a lower rate is offered. Conversely, if the negative attributes out weigh the positive a higher rate is offered. All of the factors I just mentioned have a direct impact on both rates and fees.
No More Greedy Loan Officers
Keep in mind, though, that the Dodd-Frank Act of 2010 has changed how a lender is to originate and close loans. The guess work has been removed, loan officers are limited on how much they can make and so a higher rate does not afford Yield Spread Premiums to lenders any more so the changes force most lenders to pay their loan officers either a base salary so the loan officer isn’t living like a king one year and a pauper the next.
Part of the reason I left the business in 2009 was because everyone took a huge hit on their incomes and the act I just mentioned hadn’t the momentum it needed to pass especially from the MBA, not to mention the lenders, bankers and brokers that were lining their pockets and at the same time paying their loan officers less and less.
This type of environment forced many loan officers to do things that they may not have done, ordinarily, and to my mind, I was not going to violate the canons of what a legitimate, ethical, and moral person does just to earn a buck.
Risk Based Mortgage Pricing
The lender now has to let the borrower know when they are charging higher rates than other customers. The lenders need to specify the fact what factors caused the higher mortgage interest rate. In most cases the FICO score figure would be the reason for a customer to get higher mortgage home rates.
This gives the borrower a chance to act and influence the rate, if they do an effort and raise their FICO score. There are many programs which help borrowers raise their FICO score, most of them do not cost much, and the benefit of adding 30 or 50 points to the score can result in a direct saving of thousands of dollars.
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