Risks of Risk‐based Pricing of Mortgage Credit

Publication Date

October 2014

Author(s)

Kevin A. Park

Client/Funder

Ford Foundation

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Overview

The use of risk-based pricing mechanisms exacerbate volatility in the housing market by increasing the price of credit in housing downturns, depressed markets and lower credit quality borrowers, which reduces demand for housing.

More uniform pricing across the housing cycle, different housing markets and borrowers can improve stability and maintain affordability.

Government-supported housing finance agencies can pool risk and use average-risk pricing, instead of risk-based pricing, to improve the health of the housing market.