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July 15th, 2008

Risk-Based Pricing, a Necessary Evil?



There are several similarities between the effects of the subprime mortgage crisis and rising oil prices. Escalating oil prices have burned holes in the pockets of consumers across the US, forcing drivers to alter their habits – driving less, ditching their SUVs for smaller and/or greener vehicles, and shopping smarter to save money for other goods. The upside: high oil prices have lit a match under government and private companies to develop and explore alternate, cheaper, and more productive forms of energy.

The subprime mortgage crisis was, and still is, devastating the real estate market. Foreclosure signs continue to adorn front lawns across the country. The upside: after the smoke cleared, the government realized lenders have to start doing things differently. Since the foreclosure storm hit, lenders have been forced to change their lending practices and develop new types of loans, under new restrictions, to prevent another crisis that spawned from irresponsible lending and borrowing.

Yesterday was the day the Federal Housing Administration (FHA) was required to implement risk-based pricing (RBP) for all their single-family loans; one of the many new practices designed to prevent future mortgage loss. RBP allows lenders to make a more informed decision on the nature and reliability of the borrower at the point of origination. Borrowers, who pose a greater risk of defaulting in the future, are charged a higher rate to protect and maintain the self-sustaining pool of FHA-insured mortgages.

Despite the Senate’s opposition to RBP, the Department of Housing and Urban Development (HUD) is set to move forward with the “risk-assessment” as planned, as it’s part of their new FHA Secure program. US lawmakers continue to mull over different versions of a housing rescue bill, where RBP is included in some versions but not in others. President Bush supports RBP and down payment assistance programs as valuable tools for the FHA to keep the responsibility of supporting defaulting homeowners off the shoulders of taxpayers. Opponents of RBP argue that the government is essentially charging the poorest and weakest borrowers the most money.

Just as rising oil prices forced the US to implement and develop alternate forms of energy to preserve our way of life, the subprime mortgage crisis has forced the country to change the way they insure money to preserve a self-sustaining economy.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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