Higher Rates for Borrowers with Mediocre Credit

Dec 5th, 2007 @ 1:11 PM by MortgageMentor

Thirty year fixed rates have been falling quite a bit over the past couple of weeks giving many loan officers a mini refinance boom.    The media has also been buzzing regarding the Federal government stepping in to assist borrowers by freezing interest rates on many subprime loans.  However, lost in all this madness is that Fannie Mae is making very significant changes in how conforming mortgages are priced that are going to stick it big time to borrowers with mediocre credit histories.

It used to be that Fannie Mae’s loan pricing didn’t significantly take into account FICO scores.  For instance, a borrower with a 640 FICO score could possibly get the same interest rates as a borrower with a 750 FICO score depending on their particular loan scenario as long as the Fannie Mae’s Desktop Underwriting system approved the loan. 

Now, Fannie is increasing pricing based on FICO scores regardless of the underwriting results.  In general, this means consumers with less than 680 FICO scores are going to see significant increases in interest rates because mortgage brokers and banks will have to pass these costs on to consumers.

Different banks have varying schedules as to how these changes are going to affect their rates, but a cursory look is showing that some borrowers could see as much as half percent difference in rates relative to the old system.  This means consumers are really going to have to be informed about their credit scores prior to shopping for mortgages, as the exact score is going to have a significant impact on the rates offered.

These changes are probably appropriate given the increase in risk for mediocre credit borrowers.  However, it does make you wonder if Fannie Mae has finally figured out that maybe their underwriting guidelines are woefully inadequate.  I mean is it really rocket science to deduce that people with 630 FICO scores don’t pay stuff on time and might be a higher risk so you should charge them more to reflect that risk?  At the same time, one has to wonder if lenders still haven’t figured out that FICO scores alone aren’t a good indicator mortgage performance either, if they are still relying so heavily on them as well.

And the beat goes on…