Risk Based Financing - For Many, Loans are about to Get More Expensive
4th December 2007
Chicago, IL -Mortgage interest rates dropped sharply over the last week. Conventional fixed rates are now in the fives, their lowest point in the last several years. This is big news for consumers. Anyone who bought a home in the last few years should look at what they are paying now and see if it makes sense to refinance their mortgage. Anyone who is in an adjustable rate loan or has a second mortgage or credit card debts they want to consolidate should be breathing a big sigh of relief. This is a chance to bail out and lock in to the lowest rates we’ve seen in a long time.
With rates this low, we in the mortgage industry should be doing the happy dance. The phone is ringing again and those bare pipelines are starting to fill. It is great to be in another mini re-fi boom, but there are dark clouds on the horizon. Even as rates go down, mortgages are about to get more expensive for many consumers.
There is a new change in the mortgage market that will affect anyone who is looking for financing, whether for a purchase or a refinance. It is called Risk Based Financing, the idea that those borrowers with the best credit scores will be able to get mortgages at the best rates, and those with lower credit scores will have to pay more. This isn’t talking about Sub-prime loans or loans for people with bad credit. The people affected by this change are borrowers with credit scores good enough to qualify for Fannie Mae and Freddie Mac based conventional financing.
This concept has been talked about for years, but it is only now with the real estate market soft and foreclosures rising that it is going into effect. Or more to the point, it’s only going into effect now when the big mortgage players are taking it on the chin for all the bad loans they wrote when credit was easy. Freddie Mac and Fannie Mae, the 2 largest purchasers of mortgage loans, will put this in place for all loans they buy as of March 2008. This means that all the wholesale lenders will react to the change by pricing it into their rates sooner. Some already have. Chase Mortgage, one of the largest wholesale lenders changed to a risk based pricing model for loans locked last week. All the other wholesale lenders will follow suit in short order. The pricing hit will be based on the borrower’s 
credit score and their loan to value, that is, how much equity they have in their home. Those with lower scores and not much equity (first time home buyers?) will be hit hardest.
Risk based financing means that good credit is more important now than ever before. If you are thinking about buying a new home soon, or if you’ve been putting off that refinance because you thought rates would drop lower, you might be surprised that things have changed. The best thing they can do is review your credit early and address any problems now. Here at Illinois Mortgage Rates and News I will have more information about credit and ways to improve it in the coming weeks.
Update - To learn more about credit and how to improve your credit scores, here is a series I put together.
Understanding the credit system
What makes up your Fico credit score
10 Ways to improve your Fico score
How to fix mistakes on your credit report and rebuild your credit
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