- The Washington Times - Friday, April 18, 2008

Thanks to the paranoia created by the mortgage meltdown, quoting an interest rate is now a bit more difficult. Fannie Mae and the Federal Home Loan Mortgage Corp. (Freddie Mac), the two government-chartered entities that purchase loans from banks, have implemented the so-called risk-based pricing.

Before the mortgage debacle, a borrower purchasing a home with a 10 percent down payment and a credit score of 650 would probably receive the same interest rate as a borrower with a 50 percent down payment and a much higher score of 800, for example.

A credit score of 650 is considered fair at best, while an 800 score is considered extraordinary.

Likewise, a mortgage loan taken out accompanied with a 50 percent down payment is considered far less risky than a 90 percent loan.

One of the primary culprits in the mortgage crisis and subsequent credit crunch is the “pooling” of mortgage-backed securities.

During the housing boom, a 90 percent loan signed by a borrower with a 650 score might be combined in the same security as a 50 percent loan signed by a borrower with an 800 score.

Investors were not so concerned because the rising home prices increased the value of the collateral of the loans.

Now that the pendulum has swung the other way and property values are no longer increasing, investors in mortgage-backed securities are much more concerned about a borrower’s ability to repay a loan.

Let’s go back to my two fictitious borrowers and see what kind of rates I could offer them.

Let’s assume each one is seeking to refinance a $300,000 loan and wants a 30-year fixed-rate loan.

Since the borrower with the 800 score is seeking a loan equal to 50 percent of the value of his home, his home should be worth $600,000.

As of this writing, I would quote this fellow an interest rate of 5.75 percent with no points or origination fees.

By contrast, I would have to quote the 90 percent borrower with a 650 score a rate of 6.375 percent with no points. Since the loan-to-value exceeds 80 percent, this borrower would also have to pay private mortgage insurance (PMI).

This would add another half percent to the rate.

The 50 percent, 800-score borrower would have a principal and interest payment (P&I;) of $1,751 per month.

The 90 percent fellow would carry a P&I; of $1,872 plus a mortgage insurance premium (PMI) of $125, making his total payment $1,997.

Don’t be surprised if your loan officer is unable to give you a firm interest-rate quote until he receives the property appraisal report and credit report. However, a good loan officer should be able to tell you ahead of time what you can expect based upon credit score and value assumptions.

The mortgage market continues its evolution.

Stay tuned.

Henry Savage is president of PMC mortgage in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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