Product and Pricing Engines (PPE): Strategic Uses for Compliance, Competitiveness and Profit

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2 Strategic pricing tools improve success with prospects and create financial benefit for the firm. Once Considered a More Efficient Substitute for a Rate Sheet Pricing Engines are Evolving to be the Compliance Ready Selling Tool for Originators and a Strategic Profit Optimization Tool for Secondary Marketing! The role of the pricing engine has certainly evolved over the past few years. A best-in-class solution should include functionality that helps you get the right offers on the shelf, provide the tools to discuss them and the controls to adjust them as market conditions change. In today s marketplace, borrowers are both more informed and more cautious, regulations are tighter, and competition for demand is fierce. It is a given that your loan offers must be accurate, but you also must arm your originators with the tools that help them more effectively sell and discuss a variety of options with each loan prospect. Brand name investors are closing up shop while new investors are entering the market. Adding them seamlessly into your product mix with no impact to workflow is essential. Pricing engine technology can do just that and give Secondary Marketing resources the tools and controls to manage volume across investors, leverage improved pricing to be more competitive in the market, and optimize profitability to cover costs and make money. While originally designed to replace the manual process of downloading rate sheets and eligibility guidelines, the new breed of pricing engine has become a strategic pricing tool that improves success with prospects and creates financial benefit for the firm. This white paper will describe three best practice uses for today s best of breed pricing engine. 1. Pricing for compliant, consultative selling 2. Pricing for marketplace competitiveness 3. Pricing for profit optimization Page 1

3 Pricing for compliant, consultative selling With the goal of consistently providing borrowers with offers in their best interest, today s pricing engine should enable originators to discuss: A qualifying loan offer with the lowest interest rate. A qualifying loan offer with the lowest interest rate and no risky features. A qualifying loan offer with the lowest total dollar amount for origination fees and discount points. Most pricing engines can accommodate this requirement, but a best of breed solution should go beyond these fundamentals and improve the overall quality of the rate discussion with a borrower. Given the purchase of a home, for many, is the most significant financial transaction they will make, it becomes a competitive differentiator to make this a positive experience. Educating the consumer and building their confidence through every step ensures satisfaction. The sooner you can garner that confidence, the quicker you will minimize the desire to shop. The pricing engine can be the key selling tool that secures the prospect early in the process. Pricing engine technology should support a more consultative discussion with the borrower and help to educate them on the rate and product options that best meet their financial goals. The ability to compare multiple loan scenarios can help borrowers understand the impact of decisions they need to make when selecting a mortgage product. The role of the Product and Pricing engine (PPE) was to provide best execution pricing. Best of Breed engines have now evolved to become true selling tools that capture the facts and circumstances of the borrower discussion and use pricing and eligibility data to improve loan quality early in the origination process. What is the impact of different down payments? How does the amount of debt I have affect my choice of products? When refinancing, how much cash can I take out? Evaluation of the borrowers eligibility or ineligibility for various types of mortgage products is part of the core value of a pricing engine. Best of breed solutions provide a 360 view of eligibility with quick access to representations of this data that are easily comprehended and speed an orginators ability to discern eligibility issues or requirements. Page 2

4 Why is this borrower not eligible for a product? What are the guidelines related to unique scenarios, such as credit restrictions stemming from foreclosures, or guidelines related to pension income or mortgage history? Does this scenario require mortgage insurance? Will there be surprises with the property appraisal? Validating eligibility and loan scenario details earlier in the rate discussion can help improve loan quality from the start and ground your good faith belief that the consumer qualifies for the loan with the facts to back it up. In today s growing regulatory environment, the pricing engine should also play the role of capturing the facts and circumstances related to the borrower s choice of offer as an element of safe harbor documentation for compliance. Some organizations simply store rate sheets on a daily basis, but this does not capture intra-day price changes or the details of a specific loan scenario, the representation of loan offers discussed and the offer chosen by the borrower. Today s best of breed pricing engine should have the functionality to capture this detail. The continuity of this documentation through secondary lock also provides a level of transparency regarding pricing decisions made throughout the process and an audit trail from buy-side pricing through sell-side pricing. In the ever-changing world of compliance, documentation captured at the point of activity supports a sound compliance strategy. Pricing for marketplace competitiveness Best of breed pricing engines leverage information captured in the pricing discussion to provide another element of safe harbor evidence for compliance. Strong Secondary pricing controls can enable you to compete more effectively in different markets and optimize profitability across all delivery options and channels! Consider the channels you currently use and the costs associated with those channels. Your pricing engine can help you affect the pricing of your offers to address channel cost differences. Whether you are using a call center, retail channels, wholesale channels or all three, your pricing engine is the key technology for executing multi-channel pricing strategies. Even within channels, you may need to accommodate skill tiers. A best of breed pricing engine should provide the controls to layer your pricing and support customization to fit your business model. Page 3

5 Beyond sales channels, the markets you serve may compel you to modify pricing and the loan offers you make available. In a highly competitive market you may want to operate with thinner margins just to meet your volume goals. As you enter a new market, and need to take share from existing competitors, your pricing may also need to be more competitive. Alternately, if you are one of few lenders serving a particular area, you may have an opportunity to expand your margins. Pricing strategies executed through a pricing engine can help you control the market position you are seeking to attain. For organizations with more sophisticated marketing strategies, the benefit of a best of breed pricing engine can support the ability to surgically tailor pricing for niche markets or even particular loan scenarios. Pricing for profit optimization Today s best of breed pricing engines can help you balance risk and reward. Functionality can be used for the purposes of: Risk avoidance Risk remediation Reward optimization Risk avoidance features are simple and straightforward. They take the human error out of price decisioning and maximize the controls that can be put in place to make sure optimal pricing decisions are being made. Through lock day hedging, the pricing engine can create a cushion that helps avoid the costs associated with lock extensions or the re-locking of loans. It s a bit like the Goldilocks syndrome: lock terms shouldn t be too short (potential gains being neutralized by the lock extension fees or the need to re-lock), or too long (not as profitable), but just right (balancing risk and reward with lock terms in the best interest of both borrower and lender). Best of breed pricing engines can support the execution of the pricing strategies that will help you achieve your market position: Own a market (aggressive pricing) Market share leader (competitive pricing) Market participant (balanced pricing) Sole participant (pricing for profit) Base layer pricing in a pricing engine helps you build in costs and manage profit on the back-end, avoiding the risks associated with selling channels incorrectly accounting for costs. The more flexibly the pricing engine can support the types of relationships you have with your various channels, the better. Some branches may operate quite autonomously and need to see close to raw pricing that they can layer their own profitability strategies into. Other branches may be more closely tied to corporate cost structures and want minimal input to margin management. Your pricing engine should provide the flexibility to manage margins at multiple levels to address your channel relationships. Page 4

6 Risk remediation is another role the pricing engine can play. The reality is, the market is ever changing and organizations are seeking more sophisticated solutions to deal with that change. For these very reasons, a best of breed pricing engine needs to provide functionality to deal with risks of price change. The incorporation of market data within the pricing engine, or the availability of that information from other sources can provide an early warning of investor price changes. Because of the frequency of these occurances, pricing engine capability has evolved from reactive to proactive margin management. Temporary margins can provide profit protection when unfavorable pricing is expected. And as favorable price changes occur, the ability to sell-side reprice can capture secondary gain over buy-side pricing and give secondary marketing teams the ability optimize profit. Proactive management of lock extensions by investor creates a lifeline for a loan to a lender given unforeseen circumstances that push out the close date. Applying a fee across all investors can help to cover costs and automation of lock expiration alerting can increase the efficiency of lock communication a significant time saver. The flip side of risk remediation is reward optimization, and certainly this task is at the heart of pricing engine technology. Reward optimization spans buy-side and sell-side pricing. The best of breed pricing engine has tools and controls to optimize pricing from buy-side through sell-side price decisioning. From the buy-side perspective, margin adjustments, custom adjustors and custom guidelines help lenders control the profitability of loan offers available through their selling channels and better align eligibility requirements with the organizations risk profile. Pricing engines that support these adjustments through a layering approach offer the greatest flexibility to nuance pricing for channels, branches or groups of users. Pricing engine technology can help you adapt your pricing to market conditions and optimize price decisioning from buy-side through sell-side. As organizations move from Best Efforts to more sophisticated strategies that provide greater control over pricing, the pricing engine must also adapt. Full visibility to the pricing advantage of a forward trade or Mandatory contracts compared to Best Efforts, enable secondary marketing teams to direct loans to the most profitable delivery channel (whether internally or externally hedged). Page 5

7 Conclusion The basic ROI of a pricing engine is defined by the efficiencies it brings to loan originators when selling mortgage products, the errors it reduces and the best execution pricing it delivers that can increase an organization s profitability. Accurate pricing and guidelines. Best-execution technology. Real-time updates on product eligibility and pricing rules from investors. Advanced loan pricing analytic displays and multi-investor, multi-product comparisons. Integrate tools that qualify and increase borrower satisfaction throughout the price decisioning workflow. Today s best of breed pricing engines are offering additional return through more strategic applications that enable organizations to be compliant, competitive and profitable in their management of pricing. Must-have tool that originators use every day to improve their sales effectiveness and conduct compliant discussions with potential borrowers. Strategic tool required by Secondary Marketing to surgically and artfully define pricing to achieve business goals of profitability while minimizing risk. About LoanLogics LoanLogics was founded to improve the transparency and accuracy of the mortgage process and improve the quality of loans. With the industry s first Enterprise Loan Quality and Performance Analytics Platform we serve the needs of residential mortgage lenders, servicers, insurers, and investors that want to improve loan quality, performance and reliability throughout the loan lifecycle. Our advanced solutions help clients validate compliance, improve profitability, and manage risk during the manufacture, sale and servicing of loan assets. Our technology is supported by compliance and risk expertise that aligns with our customers need to address their own highly regulated environments. This material is provided as a general information service by LoanLogics, Inc. and its applicable subsidiaries and affiliates ( LoanLogics ), and is not intended to provide financial, regulatory or legal advice on any specific matter. The information contained herein reflects the views of LoanLogics and sources reasonably believed by LoanLogics to be reliable as of the date of this publication. LoanLogics does not make any representation or warranty regarding the accuracy of the information contained in this material, and there is no guarantee that any projection, forecast or opinion in this material will be realized. Any links provided from outside sources are subject to expiration or change LoanLogics, Inc. All Rights Reserved. Page 6