Collateral Valuation Provides Clue to Refinancing Risk.(Brief Article)

Since lenders typically pay $1,000 to $2,000 per loan to originate and acquire the servicing asset, portfolio retention has become a top concern for lenders worried about the bottom-line.

And that makes unraveling the components of prepayment risk a vital task for mortgage lenders.

Interest rates are obviously the most important factor in determining which borrowers are most likely to refinance. People who are "in the money," meaning they have a financial incentive to refinance into a lower rate loan, are likely to prepay and disappear from a servicer's portfolio in the process.

But the amount of equity a homeowner has in their property is also a factor in prepayment risk.

"People with the lowest loan-to-value have the greatest propensity to refinance, because they have a lot of options," explained Robert Walker, a vice president at Basis 100, a California-based firm that provides electronic property valuation services through its Solimar Valuation Technology.

People who have a lot of equity are less likely to have credit problems that would make it difficult to get a new loan, for instance. Also, they have plenty of room to roll some credit card debt or other consumer loans into a refinanced mortgage loan, taking advantage of debt consolidation opportunities.

That adds up to more reasons to refinance, and fewer obstacles in doing so. In addition, low LTV borrowers are prime candidates for cross-selling, making them valuable customers that a lender would like to retain.