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What is not clear, however, is whether their pricing models are any more competitive than the pricing models used by experienced nonprime lenders. Mortgage-insurance premiums increase dramatically with the increase in credit risk.
In addition, lenders who sell these lower-credit-quality loans to the agencies may be faced with increased repurchase risk because of nonperformance. This can drive their prices higher to compensate.
Interest-only trend plays part
Where do interest-only loans fit into our lending definitions? Everywhere, actually.
These loans are offered to prime, Alt-A and nonprime borrowers. They are increasingly being delivered outside of GSEs’ channels — another example of a nontraditional product that is difficult to typecast.
The housing bubble is a hot topic, and with real estate prices skyrocketing, borrowers are turning to interest-only loans to afford the monthly payments. These loans do not require principal payments for set periods. In some cases, they allow borrowers to make a minimum payment that does not cover the interest obligation, which results in negative amortization. Borrowers betting that the value of the real estate will continue to rise might want to buy the most valuable house they can to take advantage of the price appreciation — a dangerous practice, experts say.
The definitions of a prime lender, an Alt-A lender and a nonprime lender are no longer set in stone based on their borrowers’ FICO scores. Furthermore, borrowers’ FICO scores no longer limit them to one type of mortgage lender.
As market pressures force lenders to re-think their strategies to maintain volume, the beneficiaries of this changing segment of the industry will be borrowers — and the brokers who serve them. The terms prime, Alt-A and nonprime will not disappear soon. But the definitions of these terms are no longer black and white, and their lines will continue to blur in the future.
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