Monday, May 19, 2008
In my previous article I talked about the swinging pendulum of credit, it appears to be easing slightly - however it is also being re-priced. What does that mean? The chart to the left shows how much extra you'll pay for a mortgage if your FICO score is below 720 - it can get pretty hefty. I think these fees will come down, but it shows the direct correlation between Risk and Return - the riskier the borrower, the heftier the fees and the higher the rate the borrower will pay. Perhaps the market is starting to figure out that a person with no income and a poor credit score isn't the same risk as a person with money in the bank, a steady job and pays their bills on time.
The higher fees will hurt, but hopefully they will serve their intended purpose, encouraging more borrower responsibility and being compensated for risk.