Impact of Lender Choice on Mortgage Pricing

This technical report analyzes the implications of introducing lender choice regarding credit scores at mortgage origination. It discusses how this change is expected to affect underwriting processes and mortgage pricing, particularly focusing on the influence of credit scores on default risk and prepayment speeds. The report outlines that lenders will likely select higher credit scores for loan pricing, which could bias loan-level price adjustments (LLPAs) and reduce guarantee fees collected by Fannie Mae and Freddie Mac. The analysis estimates that mortgage rates could increase by 0.125% or more, leading to higher interest expenses for borrowers. The report further explains the mechanics of mortgage pricing, detailing how mortgage companies set interest rates based on various components, including mortgage-backed securities pricing and guarantee fees. It also addresses the potential impact of the transition to a multi-credit score process on mortgage pricing and interest rates, emphasizing the need for lenders to adapt their models and assumptions accordingly.