Credit union members have built up a reputation for being solid credit risks with generally high credit scores. Now, through risk-based pricing, the mortgage insurance (MI) industry is also recognizing and rewarding cooperative members’ sensible handling of credit.
Until recently, the U.S. MI industry offered pricing options to credit unions based on a limited number of loan characteristics, such as down payment, loan term, and coverage. Until around 2005, when credit scores were added as a pricing component, mortgage insurance for many credit union loans received relatively the same pricing that reflected only a few risk factors.
Although a number of MI companies had special credit union rating plans that lowered pricing by a few basis points, traditional MI pricing overlooked credit union members in many respects because it didn’t do two major things:
1. Distinguish between loans that do not pose the same level of risk.
2. Incorporate critical predictive variables, such as credit score, geography, and debt-to-income ratio.
Essentially, traditional pricing failed to truly reflect all the risk factors related to a loan. A loan to a high-credit-quality borrower in a stable market received the same MI pricing in a mortgage transaction as a borrower with a poor credit history in a market that was still recovering.
Risk-Based Pricing Reflects Members’ Value
A well structured risk-based pricing solution will allow credit unions to price each member’s mortgage loan with an MI premium that truly reflects overall loan quality. This pricing option should reflect the obvious (debt-to-income ratio, geography, and credit score, all of which are predictive of borrower default rates) to the innovative (how the number of borrowers on a loan impacts its default probability).
In a best of breed solution, this list of predictive variables will continue to grow, further refining the accuracy of the model and providing additional insight into the drivers behind loan performance.
In the end, the result should be a price that reflects members’ and the originating institution’s low risk of default.
What Does This Mean To Credit Unions And Their Members?
Risk-based pricing means members with solid credit histories save money because they are no longer subsidizing borrowers with poorer credit quality or a greater number of risk factors.
Because of the favorable MI rates available for qualifying borrowers, credit unions that adopt risk-based pricing can also provide significant savings to membership in higher-quality risk segments. Because the MI is priced for all risk factors, it also means credit unions have access to lower quality risk segments — in all markets, and at an appropriate price.
As the U.S. housing market continues to recover from the recession, credit unions of all sizes can help their members in all markets get access to the credit, and the pricing, they deserve through risk-based pricing.
Since 2010, credit unions and other mortgage lenders seeking MI coverage have had an alternative to traditional pricing: Performance Premium, United Guaranty’s risk-based model that provides greater precision in MI pricing.
United Guaranty’s automated risk-based pricing is now standard for many lenders and is available through an array of online options including loan origination software (LOS) systems, product and pricing engines, and direct or Web connections. And because it’s automated, risk-based pricing requires no rate card, further simplifying the MI aspect of a credit union’s business.
For more information about member savings through risk-based pricing, contact Shannon VanSickler, Vice President–Credit Union Channel, at 303.829.5726, or call your United Guaranty account executive today.
United Guaranty Corporation and its subsidiaries provide innovative, quality risk solutions that help mortgage lenders remain competitive while generating a profitable and responsible book of business for their stakeholders. Products include first-lien private mortgage insurance – most notably Performance Premium,® our industry-leading risk-based pricing option – and a suite of loan analysis and risk management tools. Distribution channels include national and regional mortgage bankers, credit unions and community banks, and builder-owned and Internet-sourced lenders. United Guaranty was established in Greensboro, North Carolina, in 1963 and has been a company of American International Group, Inc. (AIG) since 1981.
United Guaranty is a marketing term for United Guaranty Corporation and its subsidiaries. United Guaranty and Performance Premium are registered marks. Coverage is available through admitted company only.