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4 Key Points to Consider When Transitioning from Best Efforts to Mandatory Delivery

August 28, 2018

Making the decision to transition from Best Efforts to Mandatory delivery is a process that begins well before an organization actually takes the leap. As you contemplate the right transition time and strategy for your organization, you will want to conduct a preliminary evaluation to ensure success. 

While there are many approaches to a viable hedging strategy, those considering a plan of action should take a moment to review four critical “stepping stones” as you move forward. If all of the criteria are met, only then should you take the next step.

Step #1 - Evaluate Net Worth:

The first step focuses on the organization's financial health. An appropriate minimum net worth should fall between $1 and $1.5 million, and that is the bare minimum.  If you plan to rely on approval from GSE's and a number of other investor counter-parties, the desired minimum increases by a base of $1 million. The warehouse banks will also vary in their requirements, so it's best to discuss your plans with them early on.

Step #2 - Analyze Production Pipeline: 

To fully realize the significant financial benefit of a hedging program, a recommended monthly volume of committed loans should carry a dollar value of at least $10 million. If the monthly production volume exceeds $10 million and you are not employing a mandatory strategy, a considerable amount of revenue is being left on the table. 

Step #3 - Assess Investor Relationships:

Another consideration focuses on the active relationships you currently maintain with investors, as well as their ability to offer mandatory pricing. For optimal benefit, an organization should plan to work with a number of investors that are competitive in price. Seek knowledgeable advice on which investors offer a viable mandatory program and are a fit for your unique volume size and product mix.

Step #4 - Adjust Internal Processes:

The final key point requires a commitment to change internal processes and policies that adapt to the new approach; one that centers on efficient management of overall trading pipeline risk, while capturing the true best execution price on loan production. The new policy and procedure plan will ultimately become your internal "Rule Book," so starting with a policy and procedure template will help address the following:

ICON-check-small2Role of Secondary Marketing Dept ICON-check-small2Trade Policies & Limits ICON-check-small2Position Tolerances
ICON-check-small2Rate Lock Commitment Exceptions ICON-check-small2Lock Desk Policies ICON-check-small2Pricing & Profitability
ICON-check-small2Expired Rate Locks ICON-check-small2Pricing Adjustments, etc. ICON-check-small2Commitment Policies & Options
ICON-check-small2Risk Management Principles ICON-check-small2Risk Management Strategy  

As you evaluate Mandatory strategies, Optimal Blue stands ready to support you. We have an outstanding track record of serving our clients – both large organizations with sophisticated hedging needs, as well as those that need assistance in the transition from Best Efforts to Mandatory. 

Download Optimal Blue's Best Efforts to Mandatory: Transition & Training Guide to learn more about how our team of experts will aide your business in various stages, including pre-contract, during implementation, and post-contract. 

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