When conforming mortgages started defaulting en masse in late-2007, mortgage guarantor Fannie Mae created a loss-offsetting, fee-generating scheme dubbed "loan-level pricing adjustments".
The concept was basic: For mortgage applicants with high-risk profiles, collect up-front payments to offset potential long-term losses.
Similar to the auto insurance model in which younger drivers pay higher premiums, the riskier the applicant, the higher the fee.
At the inception of the program, Fannie Mae defined "risk" as a combination of borrower credit score and home equity percentage. In general, lower FICOs and higher LTVs paid mo...