When interest rates rise and mortgage application volume slows, the typical response by originators is to become “aggressive” with loan pricing. By doing so, these firms are willing to cut their profits and operate on reduced margins in exchange for market share.
Typically this action is not seen by the industry as a positive. Several independent mortgage companies, including PHH and Impac Mortgage Holdings, as well as some bank lenders like 1st Mariner Bancorp blame reduced earnings or net losses reported in 3Q13 on margin compression.
Businesses have to remain competitive no matter what industry they are in, says Al Crisanty, vice president of national wholesale production at 360 Mortgage Group LLC, Austin, Texas.
And typically in the mortgage industry, cutting price is not seen as a good thing. But the larger companies in the business have extremely high overhead.
At 360 Mortgage, the company is small, nimble and it has a very low cost to originate. It is fiscally-responsible, Crisanty says. The pricing model, adopted on Nov. 1, maintains profitability, unlike some of its competition.
Everyone in the mortgage industry should have anticipated the rate increase and prepared a plan to deal with it, he continues.
Yet instead of preparing for a smaller market, larger companies have been adding staff all year long. There is one company in Texas which added between 500 and 600 people this year.
His company, because of its technology platform and the efficiencies in its operations group, is able to maintain a low cost-to-originate model.
It is an opportunity to gain market share and recruit more sales and other staffers. The price cut is not a reactionary move to fill its pipeline, he says.
With others cutting staff or exiting the channel completely, it also can be an opportunity for growth, while remaining profitable originating a commoditized product.
The corporate focus is on servicing the broker and that is why 360 Mortgage will capture market share next year, Crisanty states.
Another factor that allows 360 Mortgage to have control over pricing is that it has become an agency seller/servicer. It can originate loans to Fannie Mae guidelines without having to worry about aggregator overlays.
Typically in times of lower originations, the attitude in the industry is “let’s do more loans at no margin.” But no one can survive unless they are profitable, he says.
Products the company is being aggressive in pricing on is the conventional conforming fixed and adjustable rate loans; Federal Housing Administration purchase and refis; Veterans Administration (with a 640 or above FICO); U.S. Department of Agriculture (also a 640 FICO); Home Affordable Refinance Program loans (if the borrower has an approve eligible from automated underwriting) and downpayment assistance programs like the Southeast Texas Housing Finance Corp.’s 5 Star Texas Advantage Program-Option 3, which 360 Mortgage is the exclusive servicer for.
Carrington Mortgage Services, Santa Ana, Calif., is also cutting pricing on two products, Veterans Administration-insured interest rate reduction refinance loans and jumbo loans.
Carrington has lowered rates on these programs across the board irrespective of specific attributes like credit score, loan-to-value, debt-to-income and/or property type. This reduction moves Carrington into an extremely competitive position in the market, says Ray Brousseau, executive vice president.
Service, not price, is the real factor for competition in the wholesale channel, he continues.
“For brokers and real estate professionals alike, turn times, service commitments and follow-through for their customers matter, and consistently performing on all of these fronts creates opportunities for long-term business relationships,” Brousseau explains.
Therefore, the firm offers a diverse product set and it revises its guidelines to help meet market needs. Being competitive on price is just one part of the equation to serve brokers, he says.