Don Brown is managing director of secondary services for
Optimal Blue. He brings more than 25 years of business
management, sales and legal experience to Optimal Blue,
having pioneered the application of SaaS technology toward
creating a more accurate, transparent and efficient hedge-management, best-execution and loan-allocation system.
Brown founded Optimal Blue Secondary Services, whose
technology-infused accurate pricing and guideline content
into the platform’s hedge strategy and capital markets work-flow. Reach him at firstname.lastname@example.org.
Originator’s Guide to Loan Pricing
Pierce the veil of the secondary market to find the best rates
By Don Brown
Do you remember the “Hitchhiker’s Guide to the Galaxy”? At the core of the story — written long before smart phones and tablets — was an incredibly useful, incred-
ibly simple hand-held electronic guide to the entire
galaxy that held information contributed by the very
aliens who experienced it every day. The cover even
had a reassuring message for anyone overwhelmed
by what was going on around them: “Don’t Panic.”
In honor of the book’s author, the late Douglas Adams,
it occurs that originators can benefit from a glimpse
into the seemingly mysterious, alien world of secondary
marketing and capital markets from the perspective of
an experienced secondary market hitchhiker.
It can be hard to conceive how originators perceive the
secondary marketing role. From the outside, it can look
quite mysterious and esoteric, and some secondary
market professionals legitimately bask in the complicated nuances of capital markets. The reality is that the
secondary market is not that opaque — at least the
Granted, there are many parts of the secondary
marketing process that can make heads spin. A panel
discussion at the 2017 MBA National Secondary Market
Conference & Expo, for example, which explored
strategies considered when an aggregator translates
a security price into a mortgage price, became a bit
over-whelming for many observers.
Although the theoretical and mathematical intrica-cies of this process are interesting to some, originators
need not feel intimidated by the intricate details, and
should be open to understanding basic secondary
marketing concepts, so they can see how they fit into
the entire mortgage process, thus making them better
at their jobs.
At its core, secondary marketing generally focuses
on four concepts:
n How to price a loan to entice an interest rate lock
n How to hedge that lock;
n How to find the best execution for that lock when
it matures into a loan; and
n How to report profitability and diagnose slippage
It really is that simple. We don’t have the unlimited
space of an electronic guide to the universe, so instead
we’ll focus on pricing, which is the part of this process
nearest and dearest to the hearts of originators.
Before discussing pricing, however, it is important to
understand why your company originates loans. It’s
easy to understand why originators work so hard to
close loans: Commissions are king. But why is the company interested in originating those loans?
If you work for a depository bank or credit union,
the answer may be as simple as providing a benefit to
customers or members. In those situations, secondary
marketing is not as critical, because these institutions
may have the luxury of putting loans into their portfolio. This strategy is limited by available capital and risk
tolerance, however, and is not available to independent mortgage bankers.
If your company doesn’t want to keep the loan
on their books, then they must sell it. Choosing the
right investors often depends on what kind of origi-
smaller niche of investors will better suit your com-
pany’s loan profile.
Essentially, each mortgage company must figure
out where it will sell its loans. Their choice of investors
ultimately boils down to a combination of relationships, pricing, operational capabilities and stature.
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