Studies Affirm Risk/Price Link in Mortgages

The interest rate charged on a mortgage loan is directly related to a borrower's credit risk profile, according to two new studies commissioned at the request of the National Home Equity Mortgage Association.NHEMA said the studies of approximately a million mortgage loans made last year found that the higher the FICO score, the lower the interest rate, and that borrowers who have more-secure income and occupy their homes, and whose loans have lower loan-to-value ratios and contain prepayment penalties, pay less than others. One author, University of Virginia Professor Richard F. DeMong, said the question of how risk factors and prepayment fees affect mortgage pricing arose last year when he testified before Congress, and that he "had to admit that I didn't know of any hard data on these issues." He said the latest studies "directly address the vital questions -- Is the mortgage market efficiently pricing loans based on risk? Are prepayment fee clauses on loans an option that really benefits consumers?" The studies, commissioned by the Birmingham, Ala., law firm Sirote and Permutt PC, found that each 10-point increase in a borrower's FICO score reduces a loan's annual percentage rate by 10 basis points. The association can be found online at http://www.nhema.org.