By Aryne + Dulcinea, May 7, 2018
By Aaron Nawrocki, Capital M Lending
For many years, all eligible borrowers received the same interest rate. In essence, there was one base interest rate, and if your mortgage was approved, that’s the rate you got. While it may not have been perfectly equitable, it certainly made it easy for lenders to quote interest rates and for buyers to understand. However, the development of big-data and risk assessment platforms, lower interest rates may be attainable for low-risk borrowers.
In 2008, Fannie Mae (FNMA) and Freddie Mac (FHLMC) added interest rate adjustments for different loan characteristics. After the government-sponsored enterprises (GSE) went into receivership, they examined their portfolio and its performance, adding extra charges to their base rate for factors such as:
– Lower credit scores
– Using a concurrent second mortgage (combo loans)
– Type of refinance transaction (cash out refinances)
– Down payment percentages
The idea was that the above factors affected risk – e.g. lower credit score loans would default more frequently. Consequently, borrowers with fewer risk factors are more likely to get lower interest rates than their counterparts. Raising the cost for higher risk loans would better connect a mortgage’s risk to its cost. It’s analogous to car insurance – if a driver has a few tickets, the cost of insurance is naturally higher as the insurance company is more likely to suffer a loss.
The adjustments to rate put in place in 2008 (and adjusted thereafter) are constant across all lenders for conforming loans, as they’re established by FNMA/FHLMC. Here’s where it gets interesting. Fannie and Freddie back tested their tweaks in 2014 to see if the interest rate adjustments accurately reflected the loss ratios based on loan characteristics. What they found is that they overestimated the loss ratio for high credit score borrowers and underestimated the loss ratio for low credit score borrowers. In other words, “risky” borrowers were getting a better deal than “premium” borrowers. To think of it in health insurance terms, the healthy were paying for the sick.
Markets have a way of evolving in response to information and big data is a buzzword we see all over these days. As mortgage banks (and FNMA/FHLMC) build deeper databases and connect loan characteristics to loss rates, expect to see more complex pricing. There will likely be a greater range of interest rates offered, with larger discounts for higher credit scores and larger down payments. Banks and buyers will adapt to these changes and they’ll become part of the marketplace. For buyers, it means that keeping credit scores as high as possible will be more important in securing lower interest rates. Credit scores will be examined in an upcoming column and I’m always available to answer and financing questions you may have. To learn more about current real estate trends, or to speak with a real estate specialist about buying or selling a property, contact Aryne + Dulcinea. Their expertise in today’s market will ensure you have an optimal experience during your next real estate venture.
Aaron Nawrocki has over 20 years of direct experience overseeing mortgage and loan processes, working to provide clients the market insight and lending expertise required to make informed decisions.
About Us:
Over the course of their professional partnership, Aryne + Dulcinea have helped over 200 clients prosper in their new lives. During this time, they have prided themselves in their top-notch selling abilities, with homes outperforming market standards, consistently exceeding list price while most of their listings sell in under 7 days. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching your real estate goals.
Aryne + Dulcinea
Earth Advantage Principal Broker | Earth Advantage Broker | ADU Specialists | OR
She/Her
Aryne + Dulcinea are full-service, high-producing agents, who understand how to navigate the unique challenges facing the Portland real estate market. The secret to their success is in their professionalism and complementary skill sets. In 2012, Aryne + Dulcinea saw an opportunity to combine their creative and technical wisdom to create a values-driven, full-service agency unlike any other. Expert negotiators and project management mavens with a strong background in creative marketing, Aryne + Dulcinea serve as fierce advocates for their clients. Their passion for real estate relates closely to their commitment to the Portland way of life, which entails a dedication to sustainability and appreciation for all things local. As Earth Advantage Brokers and ADU Certified Specialists, Aryne + Dulcinea are savvy in all aspects of alternative living practices—from versatile housing additions, green building practices, and revenue-generating strategies. Whether you’re looking to buy or sell, Aryne & Dulcinea will work in collaboration to guide you in investing in your future and reaching you real estate goals.
Aryne greets working with clients throughout Portland with open arms. Licensed since 2005, she appreciates the ever shifting desires her clients have as they move through their real estate goals. Investigative genius on her side, Aryne will strive to bring you the results you desire. When not working for you, Aryne is a constant cheerleader for her son and daughter’s pursuits on the basketball court and on the ballet stage! She practices yoga, hikes, loves to walk and explore Portland neighborhoods, reads, and delights in soaking up everything Portland has to offer!
Dulcinea thrives on working with clients with a range of real estate goals. Oregon born, with a design and an award-winning professional background, Dulcinea is steadfast when it comes to working for her clients and has a keen eye for properties that best serve client objectives. Licensed since 2013, Dulcinea works in and around Portland. A mother of two and wife to her high school sweetie—in her free time she stays busy with her family, travel, community activism, exploring the outdoors, curating art shows, and dreaming big!
Click here to get to know Aryne + Dulcinea!- T: 503-380-5124
- F: 503-961-8224
- aryne@livingroomre.com
