In this article, we will discuss front-end pricing strategies for building rate sheets to help mortgage lenders increase their profitability.
Table of Contents
- Three Steps to Build Mortgage Lenders Front-End Pricing Rate Sheets
- How to Create a Rate Sheet and Set Prices for Increased Profitability
- Seeking Product and Pricing Expertise
Three Steps to Build Mortgage Lenders’ Front-End Pricing Rate Sheets
How to present rate sheets and build front-end pricing is a key strategy in margin management for mortgage lenders.
At MCT, our Product and Pricing Group assists in educating clients about how best to white-label their rate sheets for increased profitability. A feature for front-end rate sheet creation will soon be made available for self-management within MCTlive!, the award-winning loan pipeline management software.
The following three steps illustrate the basics on how to build your front-end pricing and present your rate sheets to customers for proper margin management.
1. Display Your Prices to Loan Officers
The first question to ask yourself in auditing your pricing processes for margin management is, “How is the company displaying pricing to loan officers?”
The easiest way to display pricing to loan officers is to take the published investor rate sheet and drop your margin on top of that.
In the next step, we will discuss how the loan officer will see exactly which investor they are locking to within your company’s management system.
2. Alias Your Investors
The next step is to alias those investors listed on your rate sheet. Instead of your loan officers seeing the names of your investors (i.e., Wells BE, Chase BE, CMG BE, Penny Mac, etc.), they will instead see some alias of their name (i.e., Gov2, Gov3, etc.).
After you alias your investors on your front-end rate sheets, you will need to make an adjustment on the operational side. In this strategy of front-end pricing, the loan officer will not know which investor they are locking with, but the underwriters will need to know. Once the loan is locked, you will want to communicate the selected investor to the underwriters.
The underwriters will then jump into those specific investor websites to underwrite the loan files, taking into consideration the various investor guidelines and underwriting accordingly.
3. White-Label Your In-House Suite of Products
The next step is to create your own in-house suite of products by white-labeling your rate sheet.
When you present your front-end pricing, instead of seeing an alias or investor, loan officers will now see the company-branded product with the company’s name.
This creates consistency and helps the lender to know exactly what profits that they will make on each loan presented to customers.
The Value of an In-House Rate Sheet
MCT’s pricing services add value to clients by guiding them to develop an in-house suite of products on their rate sheets.
The main benefit of white-labeling your rate sheet with an in-house suite of products is that it allows you, as the lender, to target and maximize your margins and develop a consistent, positive experience with your loan officers.
Explore the services offered by our Product and Pricing group.
Contact us to receive guidance on pricing profitability strategies.
How to Create a Rate Sheet and Set Prices for Increased Profitability
In this section, we will review how a lender can create a rate sheet and also how to create base prices that will go into the lenders’ respective pricing engines.
In MCTlive!, our “Rate Sheet” tab will soon give clients the ability to generate their own rate sheet with the lender’s preferred name and selected pricing engine.
With this industry-leading software, lenders have the ability to manually add products and build the rate sheet that they will be generating for loan officer use. As the lender is building the rate sheet, they will be able to select their participating programs and create their own unique naming conventions displayed to their loan officers.
From there, lenders can start picking which investors they want to include in their Best Execution. When lenders have the ability to designate specific margins on top of investor pricing at their own discretion, they achieve greater control of their profitability and oversight.
With software such as MCTlive!, you can choose custom options in that Best Ex pricing process, such as establishing guardrails that allow you to grab the second best price, an average of the best two prices, or any other combination of pricing that is suitable for your business. Depending on how comfortable you are with your investors you can customize your pricing choices accordingly.
After setting your preferences for rate sheet generation, it is recommended that the lender build out their own lock terms, low rate, high rate, and state-specific assumptions within the rate sheet.
Lastly, it’s important to remember that there are specific pricing strategies for different executions. As we will review in the following two sections, if you are doing mandatory executions or selling to government agencies, there are other pricing considerations to be made.
Pricing Profitability Strategies for Mandatory Executions
Setting up a lender’s unique pricing scenarios is really very important when the lender is tagging a specific investor for mandatory execution.
This is because when a lender goes to sell a mandatory execution loan to the investor with the best price, it’s possible that price could change within the next 30 to 45 days after market movements.
If the lender doesn’t “mute out” those stand-out prices, or pricing outliers, and make those preparatory pricing adjustments, the lender could later experience an investor pricing change that embeds volatility into their final profitability.
To anticipate these market changes with mandatory executions, MCTlive! includes a modification tool called the “Spread to Cover” feature. If, for example, the winning investor is beating the “cover” by 50 basis points, that might be the best execution but not necessarily the safest execution.
Instead, it is recommended that the lender builds in additional margin, as a cushion, to bring that investor to the level of the less aggressive majority prices. With this strategy, the lender is protected when that “Best Execution” chosen investor is really aggressive for one week and then dials back their pricing in the next week.
With this mandatory execution pricing strategy, the lender using this tool will be successful in maintaining their profit margin if a pricing adjustment is made 30 to 45 days after locking the loan.
Pricing Tools for Agency Approvals
For lenders that have government agency (“Agency”) approvals, it’s important to utilize pricing tools within your loan pipeline management software that are specific for maximizing margins.
Some lenders don’t want to generate their rate sheets off of aggregator pricing exclusively. If they also have agency approvals, the lender may choose to set up unique pricing iterations for Agency loans.
If you are a lender with Fannie approval, you have any number of SMP or co-issue approvals as well. The rate sheet tool within MCTlive! encourages lenders to select specific iterations of co-issue takeouts that the lender would like to combine with the lender’s base price.
MCT recommends that the lender sets the software to their low rate and high rate, a different delivery period than what you would be grabbing from your cash window rate sheet, along with your basic loan issue assumptions. This allows the lender the control to add in additional margin.
The most important thing to understand about Agency API parameters is that if the lender decides to issue a reprice for any reason, that Fannie and Freddie prices are tied to pricing APIs directly. This means, if you were to regenerate your rate sheet, it will give you the benefit of continuing to grab live prices. Ginnie Mae is different from Fannie and Freddie because a reprice will provide the lender with security pricing only.
Seeking Product & Pricing Expertise
After reviewing this article, we hope you feel confident about setting prices and navigating rate sheet strategies, especially with the help of MCT’s Product and Pricing division.
MCTlive! will soon give lenders full control to generate their own rate sheets for their specific business needs to increase their profitability. To get expert guidance on pricing for margin management, contact MCT today. We would love to help in any way we can by having a one-on-one conversation about your business needs.
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