Risk-Based Mortgage Pricing
What is 'Risk-Based Mortgage Pricing'
Mortgage lenders' offers of different interest rates and loan terms to different borrowers based on a grading of the credit worthiness of each borrower. Lenders grade borrowers, and offer different rates and terms to borrowers, based on several criteria including the borrower's credit score, payment history and the loan to value (LTV) ratio of the mortgage. Risk-based pricing is commonly used by Alt-A and subprime lenders.
BREAKING DOWN 'Risk-Based Mortgage Pricing'
Risk-based mortgage pricing has expanded the types of mortgages lenders offer and increased the number of borrowers that can generally qualify for a mortgage. Alt-A and subprime mortgages, the types of mortgages generally subject to risk-based pricing, are frequently sold by the mortgage originator into the secondary mortgage market, where they typically become part of collateralized mortgage obligations (CMO), asset backed securities (ABS) and collateralized debt obligations (CDO). Risk-based pricing plays a large part in the structuring of CMO, ABS and CDO, enhancing their overall credit rating and making them attractive to wide range of investors.