Risk-Based Mortgage Pricing

Giving Jeff Bezos a loan for his cabin-by-the-lake for $1 million? Well, since he's worth $100 billion, odds are good that he can pay you back the mortgage you're writing for him (and yes, we know...stupid example, because you'd have to be a qualifying bank to write a conforming mortgage, i.e. one available for the mortgage tax credit up to $500k, but humor us here.) So...Jeff's a good risk. His price for renting our mortgage money? Just 4%.

Now meet Bob-the-Riverboat-Gambler. Bob's worth millions. Then nothing. Then millions. Then nothing. Bad risk. So Bob, if you want our loan, we're going to risk-adjust your mortgage price (and terms). You'll have to get PMI, or private mortgage insurance, so that, when you likely default, we can still collect...and you'll have to pay 12% interest for the loan. You're just too risky. Don't like it? Go down the hall and see Benny the Loan Shark. Follow the baseball bat logos on the ground to get there.