Default, Prepayment Factors Are Key to Risk-Free Pricing.(Brief Article)

While there are a number of definitions of risk-based pricing, the one San Francisco's Mortgage Information Corp. uses is "the right product and price at the right place and time."

The right price, said Kyle G. Lundstedt, vice president of analytics for the company, is one that compensates the investor for default risk, delinquency, prepayment risk and loss.

There needs to be a terrific set of analytics in order to put together the appropriate price and product combination, he said.

Mr. Lundstedt said that the adoption of risk-based pricing across a whole mortgage company is difficult and rare, but its successful implementation is driven by the secondary marketing group.

Different groups in the company have differing perspectives on risk-based pricing, with varying levels of sophistication. In addition, these groups tend to focus on their own responsibilities and not "cross-firm" interests.

Automated underwriting is a widely accepted form of risk-based pricing, but typically there are only two or three gradations. Loan grading, such as Standard & Poor's Levels, is more sophisticated, with 10 gradations.

MIC's Risk Model, and similar ...