Mortgage Rates Undergo a Transformation

Just as the insurance industry has done in recent years, the mortgage industry is now undergoing a radical transformation in response to its recent financial losses. As the changes take shape, it could mean additional fees and higher rates for consumers when applying for a loan.

A few years ago, the insurance industry started cracking down on policyholders. They began doing things such as restricting the breed of dog a homeowner could own, denying claims for fallen limbs if the tree in question was diseased, and doing on-site inspections of homes to ensure that they were properly maintained. During the first year of the crackdown, more than 100,000 homeowners lost their policies, and the industry started tracking home histories to see which had a bad track record of claims, no matter who their owner was at the time. Nowadays, a similar kind of transformation is taking place in the mortgage industry, and the repercussions for consumers will likely be significant and challenging.

Risk factors take precedence in mortgage rates

Mortgage fees and rates are now more closely tied to various metrics that lenders consider "risk factors." These include the size of your down payment, your exact credit score, and your personal employment history. Lenders have been using that kind of data for some time, but now they differentiate much more than they did in the recent past.

Credit score results, for example, used to involve much wider ranges. Borrowers would typically fall into one of four distinct categories: Super Prime (for the best scores), Prime, Alt-A, and Subprime. Within a particular category, borrowers all got treated in the same way. But now, those ranges and categories are more graduated. A borrower with a credit score between 700 and 719, for example, can expect to pay an extra half point compared to those who have scores of 720 or higher. If their score comes in below 680, they may be forced to pay three times that much in fees.

Taking the lead from insurance companies

Rather than considering half a dozen factors, such as income, credit score, appraised value, and the size of the down payment, mortgage lenders will likely begin to calculate dozens of factors. Insurance companies consider such things as proximity to fire hydrants, whether the home is constructed of brick or wood, and the number of previous insurance claims on that particular property. Lenders will likely start to look at similar data, because they're not just interested in the owner's credit worthiness, but also in the integrity of the underlying loan collateral-namely, the resale value of the house.

Superior credit will be rewarded with cheaper rates and fees. But the trend toward so-called "tailored" mortgage fees means one thing for everyone, regardless of their credit-longer delays for loans. Every new criterion adds another underwriting task to the list. This means that we can all expect longer application processing times, and more frequent delays, or last minute glitches prior to closing and funding.