I hear Originators ask: Why do my rates suck?
- in comparison to other Lenders that suck less.
To answer this question,
We'll simplify some of the secondary marketing dynamics around MBS security buy-up and buy-down grids and co-issuance impact on MSR values for servicing.
We'll assume the two lenders have the same delivery sophistication.
First: Where do rates come from?
Most mortgage loans are sold into pools of mortgage-backed securities associated with Fannie, Freddie, or Ginnie.
The mortgage-backed security (MBS) prices come from national capital market activity. MSR value for servicing is added to the delivery price to get total revenue.
On any day, you can look at the price of UMBS and see its value. There is nothing magical or hidden about MBS pricing.
There is some math needed to convert the MBS screen value to a rate sheet, which is a topic of another article. Here is a link to a few hedging articles LINK.
The point today is: Why are rates from one IMB Lender different from another IMB Lender?
Compare Lenders: MidSize IMB (MIMB) and Larger IMB (LIMB)
Assume both MIMB and LIMB get the same price when selling a 6.75% note rate loan to Fannie.
Operating Costs
All companies have internal operating costs to pay for payroll, technology, email, LOS, insurance, underwriters, etc. These operating costs range from about 120bp to 150bp.
MIMB has low overhead costs with no or few branch office leases and shared processing to increase efficiency. Operating costs per loan are 120 bp. The LO works from home and meets realtors and borrowers at Starbucks.
LIMB has high operating costs from nice branch offices with an LOA and processor in each office. Operating costs per loan are 150bp.
Sales Stack Costs
MIMB pays LO commission of 120 bp.
The LO does not need to be managed and reports to the CRO with a small 5 bp override. The LO deals directly with an internal contact for application support.
LIMB pays LO commission of 120 bp.
There are also three layers of sales management called a sales stack. The sales stack includes a branch manager, a regional manager, and a head of sales. Each sales stack position gets paid a commission override on the LO’s activity.
The branch manager gets a 30bp override, the regional manager gets a 25bp override, and the head of sales gets a 20bp override.
The sale stack adds 75bp in commission cost for each loan.
Total Pricing Margin
Rate sheet mark-up
Secondary marketing builds the rate sheet to make enough money to cover all of the costs and make a little money.
MIMB rate sheet includes LO commission of 120bp, sales support of 5 bp, and ops costs of 120bp for a total of 245bp.
LIMB rate sheet includes LO commission of 120bp, sales stack costs of 75bp, and operating costs of 150bp for a total of 345bp.
Customer rates
MIMB must originate and sell a loan to make total revenue of 245bp (120bp commission, sales support 5bp, and 120bp operating costs) just to break even.
LIMB must originate and sell the loan to make total revenue of 345bp (120bp commission, 75bp sales stack, 150bp operating costs) just to break even.
This means LIMB must make 100bp more on each loan (345 – 245) just to break even.
LIMB’s rate includes the extra 100bp cost in pricing
The customer experience is the same for both companies
The LO commission is the same for both companies
Actual rate impact
This means that…
LIMB offers 7.00% with no fees to break even.
MIMB offers 6.75% with no fees to break even.
Said another way,
MIMB offers 6.50% with 1 point
LIMB offers 6.50% with 2 points.
Conclusion
In a world where buyers have access to unlimited rate sheets, 1% better pricing matters.
The LIMB LO gets the same commission but has a 1% worse price mostly from the sales stack costs.
How do the sale stack and higher branch costs add value to the customer? Granted, a newer LO that needs product help or needs to be pushed may do better in LIMB, but which version is better for the consumer? It is also true that the sales stack is the relational glue holding volume production together, but there is a cost.
What to help improve branch financial reporting?
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MBS Financial Services supports the following areas:
Growth Strategy – We can help you plan and execute a growth strategy.
Hedging & Pipeline Risk Management - Dr. Schell can help explain how hedging functions, the benefits of hedging, and the risks associated with the activity. See blog posts.
Technology must align with a firm's strategic objective. Every mortgage lender's technology infrastructure significantly impacts its customer experience and employee workflow. MBS will help select, configure, and deploy the best technology solution.
Executive Development - Leadership is a learned skill. Dr. Schell can teach you to be an amazing leader, an effective manager, and an inspiring coach that can foster a vibrant culture.
Accounting Services – Dr. Schell, CPA, leads the accounting services team to become your outsourced accounting department. This alternative makes more and more sense for companies wishing to focus on their core business and also want trustworthy accounting and financial reporting support.
About Dr. Schell:
Dr. Andy Schell, Ph.D., DBA, MSML, MBA, CPA/CFF, CMB
Dr. Schell is CEO, Managing Partner, and Co-Founder of Mortgage Banking Solutions and the Founder of MBS Financial Services ("MBS"), based in Austin, Texas. Dr. Schell is known for his ability to turn "vision into reality" and "chaos into order" as he finds creative solutions to the challenges his clients face addressing Revenue Stability, Technology Enhancement, Financial Management, and Workflow Efficiency.
He has 4 decades of experience as a strategist directing the activity of both small and large groups of employees including mortgage lending activity at Bank of America. His leadership knowledge extends from his hands-on experience and his academic training in his MBA, his master's degree in leadership, and his doctoral work to examine employee dynamics given leader stimulus
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Find more information at
DoctorSchell@MBS-Team.com ; (512) 501-2812;
Doctor Schell the Profit Doctor