Final answer:
Risk-based pricing is the fee imposed by GSEs on loans with riskier features and is influenced by the borrower's financial stability and the current economic situation. Interest rates comparison also plays a role in the valuation of loans in the secondary market. Securitization can lead to the issuance of riskier loans when banks plan to sell them, with potential default consequences.
Step-by-step explanation:
The fee that the Government-Sponsored Enterprises (GSEs) impose on lenders for making loans with riskier features, such as long terms or high balances, is referred to as Risk-based pricing. This type of pricing takes into account the perceived risk of the loan based on the borrower's financial situation, like income level and economic conditions in the area. When loans are perceived as riskier, financial institutions will generally pay less to acquire these loans in the secondary market because of the greater chance that the loans will not be repaid.
Another essential aspect linked with loan valuation is the comparison between the interest rate on the original loan and the current prevailing rates. If a loan was issued at a low-interest rate but the current rates are higher, the financial institution will devalue the loan during acquisition. However, if the loan's interest rate is high and the current rates are low, the loan will be more valuable to the buyer.
Issues arise with securitization when banks intend to sell loans and, therefore, may make riskier loans, such as subprime loans or so-called NINJA loans, with less scrutiny. This can lead to a higher likelihood of borrowers defaulting on their loans.