Let’s start with the basics. People use the 10-year treasury as a proxy for mortgage rates and when you look historically, they move pretty much in lock step.
Below are the two graphed over the last 10 years.
When you look at the recent curve, we see a dramatic widening. Below is the last year with the final few weeks circles in red.
Is this because everything is “wonky” now? No, this is because everyone is overwhelmed with Re-Fi volume and because they can’t handle the volume even with LO working 24/7 and the pricing desk locking loans so the net result is that margins are widening out.
I have an untold number of friends, family, co-workers, acquaintances who are all of a sudden experts on the 10-year treasury calling me saying, ‘hey I did not lock yesterday and the 10 year dropped to historic lows and my lender quotes me a higher price today for the same rate’. We all wish we could have unlimited capacity, but that is not the case, so how can you manage margins more intelligently?
First let’s figure out the right competitive view of the market.
There is the old normal.
And now there is the new normal!
We need to shift how we think about things and stop looking at just a few peer lenders’ old data and start looking at more of the market in real time.
What you need to manage margins effectively
- Real-time updates on competitors pricing
- Insights into every geography, product, LLPA, and loan amount
- True customer level view of the market
- To see what your consumers see before they get a price quote from you
- Cell by cell channel specific pricing
- Alerts when your competitiveness slips or becomes too aggressive
- Cell by cell notifications when the market shifts or competitors enter or leave the marketplace
- Ability to act on market arbitrage opportunities to grow volume and increase your margins
- A view of market margin spreads across geographies, products, loan amounts, FICO, LTV and channels
- Ability to price to win
And with these capabilities you can manage your margins and optimize competitiveness.
Let’s look at actual margin changes and a changing dynamic competitive environment over the past few days and then go back a month plus.
What does this mean? This means you need to be able to adjust margins in real time to be competitive and not lose out on market share or on margin.
When we investigate the Nomis Mortgage data we see a few things:
- Price sensitive changes per product, but also per loan size, FICO, LTV and within any loan attributes
- Above are two 70LTV, 760FICO products one at 200K and one at 700k
- You can see Florida is 31bps less price sensitive for the exact same 200k loan and are the least price sensitive state. In the 700k loan they are only 16bps less price sensitive and are surpassed by GA, NJ, and RI
- This data changes daily and goes down to the MSA level
Taking this one step further what this means is that there is 31bps less of price sensitivity in Florida, so if you have the same 200K product at the same FICO and same LTV, on this given day you could charge 31bps more in margin and be at the same level of competitive in FL as you are elsewhere.
Imagine having this level of price sensitive data at every single rep line. FL v MA. Or FLA 680 FICO, 60 LTV 300K loan v the same repline at the 200k loan or the same repline but at the 80LTV.
You would be harnessing 10’s of millions of daily records to become a master of the pricing universe, seeing insights and recommended pricing changes with no need to send your data anywhere or install anything.
So, what does this mean?
- If you start to look at price sensitivity at the customer level and price your assets accordingly then you start to deliver the right product to the right person at the right price.
- This will give you happier customers with a higher margin and more volume, the trifecta of pricing.
- If you have optimized your asset side and you have optimized your funding costs/liabilities, you have now gone through your entire consumer balance sheet and reduced expenses while increasing revenue.
This is how you compete in the new normal of compressed yield curves. Happy customers. Smart pricing. More Profit.
Now how do you get there? Watch our latest webcast with CBA, How AI and Cloud Computing Have Changed Pricing on Both Sides of the Balance Sheet.