Finances and Borrower Risk Grade
Lower credit grade borrowers exhibit higher risk multipliers relative to the baseline (risk grade AA). This is due to the “credit curing effect.” Credit curing refers to the improvement in a borrower’s credit score or profile as the borrower makes and maintains a schedule of timely payments. As the borrower’s credit improves, he or she could become eligible for a prime or near-prime loan with a favorable rate relative to a subprime loan. As a result, the borrower is “in-the-money” and faces a positive economic incentive to refinance.
The credit curing effect increases as the borrower’s risk grade declines. This is because the lowest risk grade borrowers (C, CC) are paying the highest rates and, as a result, realize the greatest economic benefit from credit curing.
