Secondary Market Renaissance Needed at Community Lenders?
Every lender wants to hire more loan officers, but some will find that asking prices these days might just crush whatever profitability they thought they might have had. How can the Secondary Market Department help with a lender's struggle to hire and retain quality loan officers?
What role does Secondary play in this game?
Well, I think the answer is that we have to help squeeze every last nickel out of every single deal. This probably means new ways of pricing, hedging, and selling. It could also mean new pricing engines or keeping servicing. It appears that everyone only thinks about reducing overhead ... have we forgotten that Secondary can be a profit center?
And every little bit helps! (After all, six-figure signing bonuses for sales people are super important and of course we could never insult them by deducting the costs of their mistakes from their commissions.)
Now, this is a easy-to-accept (actually thrilling) challenge for humble Secondary Market people like me and you (I'm assuming since you're still reading). Everybody else might not be receptive at first, but it'll be our jobs to win hearts and minds until everybody gets religion.
Anyway, here are some of my quick ideas for a Secondary Market Renaissance at your institution (Full Disclaimer - whether these make sense or not will depend on your unique situation):
1. Change How You Price Loans
Change your pricing parameters. How do you set rates? Do you use mark-to-market pricing, single investor, multi-investor, or my favorite "Google the rates of 3 competitors every Monday morning"? Your pricing strategy may leave money on the table if, for example, you're pricing to Fannie standards for a portfolio loan. Are you pricing in an overlay for additional risks, such as for Non-QM loans? If you're willing to do a loan that most other lenders won't touch, the borrower should be paying with a higher rate (and often doesn't).
2. Mandatory from Best Efforts
Want to earn an extra 25bps on every loan? Look into switching from Best Efforts execution to Mandatory. You can sell to Fannie/Freddie for mandatory delivery on a dollar basis rather than a loan basis instead of selling loan-by-loan. Many shops will find the risk/reward analysis favors this decision.
In some scenarios, depositories can leverage their balance sheet to manage interest rate risk, but non-depositories will generally need an actual hedging model. And even community lenders might consider hedging too (see below).
3. Government Loans
They can be difficult, but there's a reason some lenders live and die by the 'govies' -- FHA loans, for example, can be very profitable. If you're brokering these to a third party now, ask yourself: How hard would it be to do that yourself? Am I getting compensated well enough for this loan? (seems like so many lenders are happy getting the same compensation for FHA loans as they might for conventional, when in fact they should earn more).
4. Selling Loans as MBS
You'll probably need some form of mark-to-market pricing model (as you're not pricing to any particular investor's standards), (you’re pricing to the securities market.) but no matter the hurdles, serious mortgage lenders should have the know-how to securitize loans when the market dictates as this will be the best price execution you get.
5. Hedging
And I don't mean registering loans with Fannie, I mean REALLY hedging loans. Now this isn't something you can just test the waters with ... for this to work you need to jump in with both feet. It seems to me that many depository institutions don't appreciate their advantage here - how they could leverage their financial strength and liquidity. One alternative is to let a Hedge Firm hedge the loan from rate lock to sale. Use this in combination with short-term mandatory deliveries (again, this is not a loan-by-loan hedge).
6. Servicing-Released to Servicing-Retained
Sure, selling servicing-released means (a) quick cash and (b) you don't have to run a servicing department (yikes). But for some institutions, switching to selling loans servicing-retained might make a heck of a lot of sense.
And by the way, if you're not a full-time Secondary market expert, I just might know someone available as a consultant who can help out (hint: it's me). We even have a standard service I call a "Secondary Market Checkup" where we can address a lot of these ideas and more. Click here for a brochure or contact me at GSmith@scapartnering.com or 781-356-2772 to talk more.
Your competitors are taking over. Community banks and credit unions can choose to compete or not compete, but you can’t beat the Patriots with a pee wee football team.