Mortgage Women Magazine

process) and loan substitutions in commitments are allowed so there is much more flexibility in delivery.

• Lock Desk - For a mandatory strategy, a centralized lock desk is a necessary. Some shops let their loan officers manage the locks. This will not work with a mandatory strategy. I recommend implementing a centralized lock desk first while you still are operating with a best efforts strategy. This will reduce dramatically the work required of a lock desk and will pave the way for the transition to mandatory commitments. When a new lock comes in at a best efforts shop, the lock desk must turn around and lock the loan with the investor. Data changes have to be managed on an individual loan basis. With a mandatory strategy, this does not have to be done. In addition, the lock desk would have to administer any lock changes with the investor based on the investors lock policies. With a mandatory strategy, lock policies are determined by the originator. This includes extensions, relocks, renegotiations and other changes. This means there can be consistent policy that can be published for all loans locked by the originator. In addition, the economics of the lock policy are managed by the originator and not passed along to the investor.

• Underwriting – I suggest, although it is not required, that you create a common underwriting guideline per product when selling loans mandatory. Best efforts shops lock loans with the investor as soon as they lock a rate with the customer. It makes sense to underwrite to the investors guidelines. When selling mandatory, the investor is not selected until funding of the loan. Therefore, underwriting to a single guideline gives the secondary markets group the most flexibility to sell the loan to the investor with the highest price. Issues arise when investors have soft overlays that are different from other investors. In that situation, there should be a mechanism to include or exclude investors available for the sale of the loan.

• Pricing – Many originators begin a mandatory
strategy for selling loans but continue to use best
efforts pricing for origination. I highly recom-
mended that the originator transition to one pric-
ing strategy per program to match the common
underwriting guidelines. Many loan officers are
used to picking the investor with the best price so
this might require a cultural change within the or-
ganization. And this could take time. If the origi-
nator decides to continue to offer pricing based
on investor best efforts rate sheets, extra care
should be taken to make sure that best efforts
pricing offered can be sold mandatory at a profit.
Sometimes, investors offer a very aggressive best
efforts price for a short period of time. In such
cases, it could be more aggressive than mandatory
pricing. This typically is a short-term phenomenon
and will adjust back to a price that is lower than
mandatory. But any origination occurring during
that time could experience a loss. I would recom-
mend either (1) adjusting origination spreads to
compensate for the difference or (2) locking loans
best efforts at the time the lock is taken from the
customer.

• Investor Management – When going from a best-efforts to a mandatory strategy, it is important to make sure that (1) your current investors are aware of the new delivery strategy and (2) they are evaluated to ensure that they are the best outlets for the new strategy. Many investors offer incentives on the delivery method used by the originator. By notifying investors of the change in strategy, it will ensure that the originator will make the most profit from the change.

There are a lot of opportunities to improve profitability and efficiency with a mandatory strategy. I have seen many customers successfully go from best efforts to mandatory but the work on the above items needs to be done first. For originators who have volume over $10 million per month and a net worth over $3 million that want to get to the next level, this is a worthwhile endeavor. But as you could see from the items described above, many operational changes have to take place to be successful.