Risk Based Pricing For Conventional Mortgage Loans
Before we dive into the Risk Based Pricing In The Conventional Mortgages Market, it is important to understand the mortgage market processes that led to the current situation. It is now 2011 and, in the wake of the mortgage collapse that happened beginning in 2005 and has not ended yet, many new rules and regulations have been put in place by an act, not only of the federal government, but, also by state governments as well.
The simple act of instituting just ONE change seems to be an insurmountable challenge due to the many parties and factors involved in such an undertaking. The (and I would challenge most that these are new regulations and rules) ways of doing business in terms of lending real estate monies had to change. The primary reason for this change was the rampant fraud that was taking place and this fraud was promulgated by one of the basest of all human emotions…GREED.
Mortgages Risk Based Pricing And Greed
Borrowers wanted to keep up with the Jones’s with mortgages that down the road they would not be able to afford so they could buy a McMansion and lenders, loan officers, processors, underwriters, etc who wanted to make such obscene profits on loans that the system eventually had no choice but to implode on itself and explode on the rest of the market place. The regulations that had been in place for years were set aside so that more borrowers could afford the “American Dream” and both lenders and investors could maximize their profits.
Now one asks what has any of this to do with risk based pricing in the conventional market. One needs to understand how mortgage rates and pricing are related and why rates and pricing fluctuate on a daily (many times several times in a day) basis. What drives mortgage rates up and down are the fluctuations in the bond market.
Mortgage Risk Based Pricing And The Bonds Market
In any given day, reports come out concerning PPI (Producer Price Index), CPI (Consumer Price Index), GDP (Gross Domestic Product), Unemployment, etc. All of these fluctuations influence how bonds are sold on the secondary market. In short, if the bond market yields go up and the price goes down, rates will either stay the same or go down, slightly and, of course, the reverse is true… if the bond market yields go down and the price goes up, mortgage rates are likely to rise. One must also understand that it is not just the reports I just mentioned that influence mortgage rates. Other factors have a direct influence on mortgage rates.
For example, when Clinton was in office and it was found out he lied concerning his affair with Monica Lewinsky, Japanese investors immediately pulled out of bond market, sold what they had and rates immediately spiked .75% in one hour.
In the wake of the 9/11 attacks, when the markets re-opened, the market (I am referring to both the bond and stock markets), reacted, as one might expect, violently. The stock market took a nose dive as did the bond market.
Once the markets stabilized in the days and weeks that followed, bond market pricing reacted well to the horrible news of these attacks and the stock market plunged. The bond market absolutely loves bad news, because in times of uncertainty, investors pull their money out of stocks (risky investments) and place their money with bonds (stable and safe investments). This causes the rates to drop, which is good for buyers because lower rates mean a lower mortgage payment, which means more houses can be bought. It is also good for sellers that need to unload properties that they no longer need in their portfolios. This reduces borrowers DTI ratios.
Risk Based Pricing And Home Loans
This leads now to risk based pricing and how these risks are evaluated by a lender. Firstly, every loan officer should view any loan in their pipeline as if the loan officer was lending the money to a borrower, from his own pocket.
The loan officer needs to ask himself the following question: If this were MY money and I had the kind of equity position, down monies, employment, credit, etc, this borrower has, would I lend this money to him? Many loan officers make the mistake of taking a 1003, sending it to the borrower for signature, putting it in processing, only to find out that there is something in the file that makes the underwriter squeamish about the loan.
When it comes to Risk Based Pricing And Home Loans simple common sense can be used for determining borrower payment abilities. The rate may be differ regarding the risk factor, but still in some cases, it is not enough to place all the risk management at high mortgage rates.
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