Considerations for Internalizing Your Best Execution Loan Sales: Are You Ready?

Updated: October 10th, 2023

In this post, we will explore the necessary considerations for lenders seeking to take ownership of their secondary market performance by internalizing their Best Execution Process (Best Ex).

We have seen from clients that when internalizing Best Ex processes, it is very important to have a clear educational path, tech solutions, and live support to be the most successful.

While internalizing the Best Ex provides increased control of one’s performance, some lenders may still prefer MCT’s trading team to optimize their performance and drive the Best Ex.

The choice is entirely up to the lender, but let us demystify the decision by starting with a review of the differences between an internalized Best Ex (run by you), and a managed Best Ex (run by your trader). Internalized is a very different experience than Managed, with its own benefits. We will not assert that one is inherently better than the other.

 

Internalized Best Execution Vs. Managed Best Execution

There are very few differences between an Internalized Best Ex and a managed Best Ex.

Your trader uses the exact same MCTlive! tool suite that a Secondary Director would use when at the helm. Additionally, the time commitment for training should not be too daunting either. We have seen lenders master the MCTlive! software in as few as 2-4 weeks!

Additionally, MCT Marketplace removes the trivial parts of distributing a Best Ex to investors on the Secondary Market.

The largest divergent factor between an internalized and managed Best Ex is simply the operator of the inputs and analysis.

Secondary Directors who are capable of critically analyzing multiple economic decisions (with having a touch of tech training) are qualified to run their own Best Ex.

As an example, take a situation with an existing open commitment. Is it more cost-effective to fill the commitment or pay a pair-off fee? The answer will vary depending on the analysis, but a sharp Secondary Director will be equipped with the right tools in MCTlive! to make a prudent decision.

 

2 Major Benefits of Internalized Best Execution

Internalizing the Best Ex process has the potential to yield several KPI benefits.

What’s important to note is that an Internalized Best Ex is just a very different experience than a Managed Best Ex, each with its individual benefits. We will not assert that one is inherently better than the other. The following section outlines the potential benefits of utilizing an Internalize Best Execution.

Let’s begin by recognizing that the experience and expertise of MCT Traders to manage a lender’s Best Ex is unmatched in the broader Secondary Market. Comparatively, a highly engaged Director of Secondary with few competing priorities may be able to bring special significance and fine-tuned training to a mortgage lender’s Secondary Department.

One might believe that Secondary Directors are naturally inclined to be more in touch with their own investor relationships, pipeline dynamics, and goals as an institution than a third-party manager of the Best Ex. However, MCT traders are also very engaged with managing investor relationships on a daily basis on behalf of lender clients. So, a lot of the decision comes down to the personal preference of each individual lending company.

The next section will explore the tangible, as well as, the less-quantifiable benefits of having an internal champion of the Best Execution process.

 

1. Managing Your Own Investor Relationships

A key benefit in running the Best Ex is your ability to manage investor relationships.

The most successful traders and Secondary Directors keep sight of their relationships with other desks. Those relationships are important because investors prefer to work with sellers they trust, and trusted partners provide a consistent volume of quality loans. Their partnerships with sellers often lie on a spectrum from difficult to mutually beneficial.

Your relationship with your investor Account Executives and their trading desk teams are paramount to the partnership. In many cases, if you seek to bring them business and appease their concerns promptly, they will return the favor by putting their best foot forward in pricing.

Evidence shows investors are heavily reliant on color provided by their sellers. The color investors receive from their correspondent sellers is essential to calibrating their pricing to the street.

Fortunately for investors, MCTlive! makes providing color easy. With the click of a single button, you may deliver color to investors in seconds!

In fact, investors will pay-up for production that allows them to satisfy spec pool needs (specified premiums) that investors deliver to their buyers. Experienced Secondary Professionals use MCT’s color capabilities strategically to improve relationships and pricing from their counterparties.

Further, one of your best advocates for business and improved pricing is your relationship with your Account Executive. It is not uncommon for Account Executives to be granted the authority to margin manage their clients. Good communication with your Account Executives could win you a place on their premium pricing client list.

Likewise, a smaller boutique investor might have the opportunity to offer pricing benefits to a small subset of select clients for pay ups on specific products. The unique opportunities that give you a competitive advantage are often uncovered in tightening the relationship with your counterparties.

Internalizing the Best Ex absolutely makes sense if improving your relationships with investors is a goal of your organization.

 

2. Greater Control and Transparency of Pipeline Dynamics

Another advantage gained by internalizing the Best Ex is the clarity of pipeline dynamics and contingent decision-making.

While the complexity of pipeline management is alleviated with a host of on-demand analysis and reports housed in MCTlive!, such data granularity is increasingly beneficial to a Secondary Director who runs their own loan sales. When making decisions that deviate from the Best Ex (e.g. hitting a bid lower than the highest bid) the reasoning can be complicated.

These reasons can be especially complicated when they are related to internal factors. For example, you may choose to hit a cover bid due to delivery or stipulation challenges with a specific investor. Rather than relay information to your MCT Trader, internalizing allows you the control to manage your trading according to your own view of pipeline dynamics.

As Head of Secondary, you know the underlying data of your pipeline better than anyone else. If you are aware of data inconsistencies that investors and MCT Traders are not privy to, you may mitigate your pair-offs. On the contrary, if the data from your pipeline is clean, it is much easier for you to run your own loan sales with the automated processes in MCTlive!

Now that you are familiar with the considerations and benefits of internalizing the Best Ex, stay tuned for our next publication as we will explore the path to internalizing your process.