You asked for a definition of “risk-based mortgage pricing.”

According to a number of banking and finance resources, risk-based mortgage pricing is the practice of pricing a mortgage loan based on the risk that the borrower will default. Historically, mortgage lenders physically collected documentation to consider loan-to-value ratios, collateral, credit history, and employment in making lending decisions. Borrowers who failed to meet the stringent underwriting requirements were denied credit. According to the trade publication Realty Times, the private mortgage marketplace started to use risk-based pricing in the mid-1990's, when Fannie Mae and Freddie Mac introduced risk assessment programs. With the advent of these tools, lenders could take a more nuanced approach to assessing credit. Instead of denying prospective borrowers with poor credit, the automated tools allow lenders to instead determine the proper amount to charge in order to reduce risk. It should be noted that some experts indicate that the interest rates and fees charged in subprime loans are in excess of the costs attributable to the risk. A report on the subject produced by the Fannie Mae Foundation, entitled “Risk Based Mortgage Pricing: Present and Future Research,” is included for your use.

SC:tjo