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.
Karin Good CFA, is the Senior Vice President of Secondary Operations for Optimal Blue. She can be reached at
kgood@optimalblue.com.
SECONDARY MARKET MATTERS
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