Mortgage banking involves originating loans in the primary market for sale in the secondary market, thereby replenishing the lender’s funds for new loans. Methods of sale can be through securitization or whole loan trades. For whole loan trades, one secondary market strategy is to sell production through third party correspondent lending programs. Selecting a desired correspondent involves verifying its financial strength/stability, reputation for fairness, flexibility, reliability, and potential for repeat business. Lenders/sellers should consider adding HMDA results to their checklist to increase the likelihood of realizing higher prices for the loans they sell.
Identifying Motivated Investors
Lenders are under pressure to meet the credit needs of the communities they serve. Loans made to minority or low or moderate income (LMI) borrowers, or loans made in LMI or majority minority tracts (MMTs), could command a higher price in the secondary market for lenders seeking regulatory credit. It is important for the mortgage seller to understand the regulatory credit value of the loans it wants to sell.
Look for investors with an incentive to buy these loans at the best price. This includes CRA-motivated mortgage buyers, the GSEs, as they look to improve their affordable housing purchase goal, as well as investors seeking geographic diversity. Take advantage of the willingness of private investors and the Agencies to negotiate beyond the servicing-released premiums. Recognize the market value of your product based on fair lending loan characteristics.
Map Out a Secondary Marketing Sales Plan with HMDA Data
Scoping out investors’ needs before loan sales to maximize price using HMDA data involves:
- Geocoding your loans to identify MMTs and/or LMI tracts or borrowers
- Identifying CRA reporters and/or CRA Assessment Areas (AAs)
- Ranking buyers by fair lending issues: population penetration, community lending performance, underwriting outcomes, and LMI or minority frequency
Getting the Best Execution Price Deal Done through Negotiation
Meeting the mortgage buyer’s primary needs can be leveraged to meet the lender/seller’s pricing expectations. Stress strong fair lending characteristics of your production. Don’t forgo marketing gains for bundled sales where investors need not be concerned about any one particular mortgage. While the Mortgage Backed Securities market thrives on homogeneity, there are more pricing opportunity gains for flow activity. The keys to success are knowing your loan production fair lending characteristics and bargaining parameters.
Case Study Example
Using a popular wholesale/correspondent lender search directory that lists sponsors by types of programs and requirements, I randomly selected a CRA reporter. Next, I mapped 2016 results for one of their AAs using LendingPatterns™ and Google Earth. The results indicate lending gaps exist in 85% of the low/mod census tracts shown by the red dots where no lending activity occurred. LendingPatterns™ ranking reports could also strengthen one’s negotiation position by illustrating penetration strengths and weaknesses relative to other lenders.
Target Lender’s Activity by Tract Income in AA