by Don Brown,
In my first post on this topic, A Loan Officers Guide to Secondary Marketing - Part I, I explain the difference between the primary and secondary markets through four key concepts. Let me reiterate, the common loan officer doesn't need, or want, to have a deep understanding of the mathematical intricacies that support financial gains, but the right approach IS required. So where do we start?
How about asking why are we originating the loan? I don’t mean from your perspective as an originator. That answer is clear – commissions are king. What I mean is, why is the company interested in originating the loan? Let's start by taking a look at your investor partners.
Choosing the right investors.
If you work for a depository bank or a credit union, the answer may be as simple as to provide a benefit to customers or members, respectively. In those situations, secondary marketing is not as critical, as these institutions may have the luxury of putting loans into their portfolio. While that strategy is limited by available capital and risk tolerance, it is not available to independent mortgage bankers and in the case of other institutions, it may not be the right strategy at all.
If you don’t intend to keep the loan, then where will you sell it? The answer lies in choosing the right investors based on what kind of originator you are. If you are a retail lender in a small market with solid net worth, you have the luxury of a range of investors. If you are a lower net worth originator focusing on a call center strategy, perhaps a smaller niche of investors will better suit your loan profile.
Essentially, the company that you work for must figure out where it is going to sell its loans. Their choice of investors ultimately may boil down to a combination of relationship, pricing, operational capabilities, and stature. The recipe for each organization is different, yet do not discount your own value proposition and industry reputation to achieve meaningful results. Regardless, the investor choice is a key factor affecting the pricing available to your borrowers.
Deconstructing the pricing process.
Once you become familiar with your investors, let's break down the two factors that comprise the pricing process. How does your secondary team derive their pricing, and how do you know if they are building in a margin that affects your profitability and/or attractiveness to the market?
First, let’s talk pricing structure. There are several strategies, starting from the most basic to the more sophisticated. Some originators base their pricing on best efforts, as they may only be selling on a best efforts basis. In that case, they look at the best efforts pricing available to them from their investors and do some sort of calculation to add a margin, and thus, put a price to the street. The best practice would be to conduct a true best execution, then add the margin that the company needs to make and show that price through to the loan officers. Many times, this price is labeled as the ultimate investor. Either way, a price is presented to the loan officer so they can talk to the borrower and close the deal.
Now be mindful that there are more advanced strategies. Perhaps the lender does a best execution amongst its investors (with margin included) and presents a mortgage company price alongside a myriad of investor prices. Maybe they only present you with the actual mortgage price, or maybe they price off mandatory structures such as assignment of trade, direct trade, or some other strategy based on the value to the company of retailing the servicing asset associated with a loan. The bottom line is that it shouldn’t matter to you, if you have pricing to offer to your borrower that is compelling enough to originate the loan.
Again, you just need to know that the lender is giving you the best possible price that you can take to the street to close the deal, while factoring in and truly understanding the constraints they face in presenting the price to you.
That, my friends, wraps up my introduction to the “Loan Officer’s Guide to Secondary Marketing.” I encourage you to share your comments, questions, and experiences – the Optimal Blue team is here to help you succeed, and remember – "Don't Panic!"