By The Dream Digs Team, 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.
THE DREAM DIGS TEAM
Aryne + Dulcinea, Earth Advantage Principal Broker | Earth Advantage Broker | ADU Specialists | OR
The Dream Digs Team are full-service, high-producing agents, who know how to navigate the unique challenges facing the Portland real estate market. The secret to their success lies in their professionalism and complementary skill sets. In 2012, Aryne + Dulcinea seized the opportunity to combine their creative and technical acumen to create a values-driven, client-driven team unlike any other. We are expert negotiators and project managers with a strong background in creative marketing. The Dream Digs Team are fierce advocates for our clients.
Our passion for real estate is connected to our commitment to the Portland way of life - a dedication to sustainability and appreciation for all things local. As Earth Advantage Brokers and ADU Certified Specialists, our team is 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, The Dream Digs Team will work in collaboration to guide you in investing in your future and reaching your real estate goals.
Dedicated to serving buyers and sellers with expertise, enthusiasm, and attention to detail, Aryne adeptly navigates the Portland real estate market. Licensed since 2005, she honors our clients' wants and needs using her sharp negotiating skills and professional know-how to achieve the best results for everyone she serves. Aryne loves the Pacific Northwest! Outside of work, she enjoys hanging out with her husband, listening to music, going on road trips, and talking about everything under the sun. She looks forward to visiting her grown-up kids at college and watching them succeed in all their endeavors. She loves yoga, hiking, dinner parties, podcasts, and embracing all that Portland offers.
Dulcinea thrives on working with clients with a range of real estate goals. Born and raised in Oregon, Dulcinea comes to real estate with a background in design and education. She is an award-winning professional and a steadfast advocate when working for our clients. She has a keen eye for preparing properties for listing and finding properties that best serve our buyers' objectives. Licensed since 2013, Dulcinea works in and around Portland. She is the mother of two and wife to her high school sweetie. In her free time, she stays busy with her family, traveling, creating community, cooking, gardening, making art, exploring, and dreaming big!
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