Risk-based pricing prompts agencies to adjust their fees

During the housing boom years, the dividing line between subprime applicants and borrowers deserving better rate quotes was a 620 FICO. A 700 score was a virtual guarantee of the best quotes available, FICO scores range from about 300 - the highest risk - to 850, signifying the lowest risk. Now, even FICO scores in the upper 600s and above 700 are subject to higher fees in some cases.

For example, if you are applying for a loan destined to be funded by Fannie, and you have a 739 FICO score and a down payment between 20 percent and 25 percent, you're likely to be hit with a quarter-point fee increase that you wouldn't have been charged as recently as last month.

You might protest: Since when is a FICO of nearly 740 not deserving of the lowest fees? Fannie's implicit answer through its revised risk-based pricing system: Sorry, folks, but a 739 FICO no longer makes the highest grade when the applicant can't make a 30 percent or 40 percent down payment. Worse yet, if you've got a FICO score below 720 and don't have at least a 30 percent down payment, you're going to get hit with a half-percentage point delivery fee upfront.

An interesting twist to the new series of pricing system changes: People making the lowest down payments - but who have credit scores above 720 - can expect fee decreases of a quarter of a point. Isn't that counterintuitive, because default risks rise when down payments are smaller?

Yes, but in Fannie and Freddie's worlds, all loans with 20 percent or lower down payments require private mortgage insurance to protect the companies from the deepest losses associated with foreclosures. Now both companies have decided that they can charge a little less on such loans because the insurance lowers their risk of serious loss. That's good news for moderate-income first-time buyers with sterling credit who don't have a lot of cash for a down payment.

kenharney@earthlink.net