Freddie Veep Touts Risk-Based Pricing

Risk-based pricing could eventually save homebuyers as much as $6 billion annually in unnecessary interest payments, a Freddie Mac official has told the Western Secondary Market and Lending Conference (see items above).Much of the savings would occur in the subprime sector, where borrowers' monthly payments would fall by an average of $120, said Dwight Robinson, Freddie Mac's vice president for industry relations. The savings would come from two sources: Reclassifying borrowers to reflect their true risk, and bringing efficiency and greater competition to the subprime sector. Freddie Mac has been a major proponent of risk-based pricing and is leading a foray by the government-sponsored enterprises into the subprime market by buying A-minus and B rated loans. Noting that 38% of all African Americans obtain their conventional loans in the subprime sector, Mr. Robinson told the conference his company's research has found that subprime borrowers are disproportionately minority. "That means that a disproportionate number of minorities are consigned to a market where rates are 4-5% higher, where service is relatively poor, and where there is little or no information about the options available to consumers," he said. Through focus groups, a Gallup survey, and its own statistical analysis, the company also has discovered that 20%-30% of all subprime borrowers "appear to qualify" for prime rate loans, Mr. Robinson said. The reasons for this aren't fully understood, but the fact that "so many are misclassified shows at a minimum the relatively poor job being done in this market in matching rates to underlying risks," he said. Freddie Mac's website address is http://www.freddiemac.com.