A thorough understanding of mortgage pricing systems is necessary for being a successful mortgage professional. It takes an understanding of concepts and market dynamics to grasp and master the subject. The ability to discuss pricing confidently not only allows loan officers to impress clients and close deals, but also make an impact while interviewing for a new job. With a highly competitive market, mortgage originators strategize mortgage pricing according to market demands. In this blog, we discuss how Mortgage Pricing Systems work and the factors that influence the strategies of a Mortgage Pricing System.
Mortgage Pricing 101
At the outset, let’s look at how mortgage pricing works. What is interesting about mortgage companies is that they are not depositories, so they do not have customer saving accounts for adding money. Their idea is to set up a line of credit with a bank from which loans are funded. It is a cyclic process where a mortgage is funded, bought by an investor post-close, and money is paid back to the bank to fund the next mortgage. The bank gets profit on credit to the mortgage company and the mortgage company makes money from interest paid on mortgages or by selling loans in the secondary markets. Banks may also borrow money from the Federal Reserve. Banks can borrow money as per the “cost of funds” index or lending rate of the Federal Reserve and lend to borrowers at a higher rate to make a profit. These differences in interest rates are incorporated into the mortgage pricing system to calculate the best suited and profitable pricing for the company and the customer.
Image 1- Mortgage Outcomes Image: https://studentloanhero.com/featured/mortgage-companies-choose-buying-house/
Factors Considered for Mortgage Pricing Systems
Several factors affect the design of mortgage pricing systems. There may be daily shifts in the secondary markets that also affect prices in the primary market. The volatile nature of these changes can throw off strategies and margins which is what makes mortgage pricing a challenging subject. Pricing strategies usually have an element of future expectations built-in. Many times, the prices change as new data pours in from the market. This can sometimes create confusion for observers of the credit markets. There is an implied bias about future expectations. It is up to the participants to agree or disagree with the market bias and form their pricing strategies. According to the Mortgage Professional’s Handbook, below are some of the key factors that affect Mortgage Pricing.
- Mortgage data (e.g., prepayment speeds and delinquency)
- Regulatory announcements
- U.S. fiscal and monetary policy changes
- Domestic economic events, particularly related to U.S. housing
- Corporate performance
- Financial industry conditions, including accounting changes
- Global economic events
- Various acts of war or terrorism
- Destructive natural disasters
- Changes in related market prices, such as:
- Foreign equities
- Agricultural products
There can also be unexpected events termed “Black Swan”. These are difficult to predict and are deviations from the normal. The world is currently grappling with one such event which is the COVID-19 pandemic. More on the effects of the pandemic on the mortgage industry in our previous blog.
Mortgage CRM for Mortgage Pricing
With so many factors to consider and a truly dynamic marketplace, designing a mortgage pricing system needs sophisticated understanding to stay ahead of the competition. At the same time, pricing decisions should be data-driven. They should also reach loan officers and teams across all markets instantly for them to make the best deals to borrowers. Technology has become a boon for the mortgage pricing process in the form of Mortgage CRM that incorporate Product Pricing Engine (PPE). The best Mortgage CRM platform gives tools for real-time pricing and quotes to be shared with teams in one go. This results in reduced turn-around times and higher client satisfaction due to instant and accurate information. Companies can also beat the competition with the quick launch of products. Furthermore, the use of AI and predictive analytics allows mortgage companies to optimize their pricing models for specific markets. inflooens is the best mortgage CRM in the market that encompasses all these features to provide information at your fingertips.
Image 2 Data Flow for Mortgage Pricing Image: https://www.ijungo.com/top-mortgage-pricing-engines/
How does a Product Pricing Engine (PPE) work?
A PPE is an intelligent mortgage pricing system that allows mortgage professionals to calculate pricing options. Sometimes different scenarios can be studied for borrowers to view various rate options. Using PPE with Mortgage CRM saves valuable time in the loan process by providing accurate and real-time information. Choosing the most preferred lender scenarios becomes easy for loan officers with Mortgage CRM. They can also compare different scenarios and historical averages with a given loan scenario. Additionally, loan officers can lock rates for borrowers till they finalize a home. PPE feature in a Mortgage CRM is of immense value for streamlining processes and boosting business.
Mortgage Pricing System is a critical factor in offering customers a good deal and influencing their decision. A combination of experienced professionals, reliable processes, and efficient technology makes the right mortgage pricing system for your products and markets. Especially in unusual market conditions, irrational pricing can be detrimental to the growth and image of your business. In such cases, historical perspectives guided by data and intelligent technology with smart mortgage CRM platforms are useful in making the right mortgage pricing strategies. Consistency and accuracy are of value for long-term sustenance in the mortgage market.