When margins compress, lenders seek basis point savings wherever they can. Today’s market is a prime example: With loan costs rising and volume shrinking, lenders across the country are scrambling to protect their bottom lines. In the current environment, the secondary market offers opportunities to improve margins, reduce costs, and enhance profitability.
The challenges lenders face today aren’t unexpected. In its 2022 forecast, the Mortgage Bankers Association (MBA) predicted $2.59 trillion in mortgage originations in 2022. That forecast marked a sharp 33% year-over-year decline from the flurry of volume in 2021, including an anticipated 62% drop in refinances. Further complicating the situation is the rising rate environment, with current rates sitting above 5%, beating the MBA’s recent re-forecast of 4.8% by the end of 2022.
It’s not all doom and gloom, though. Fannie Mae’s Q1 2022 Lender Sentiment Survey found the primary-secondary mortgage spread stood at 123 BPS in Q4 2021, 9 BPS ahead of the 2019 average. Additionally, the MBA forecast predicts record levels for purchases in coming years, and a Bank of America survey found that even considering the current market, 53% of prospective homebuyers are still looking to purchase according to their original timeline or even sooner.
Mortgage experts who have been through market ebbs before know that down cycles are an ideal time to audit and enhance pivotal areas of the lending process. Anthony Ianni, Maxwell Capital’s Solutions Director and a 33-year industry veteran, for instance, sees the current landscape as an ideal opportunity for lenders to review and manage their margins. In the recent eBook Mortgage Experts Take on 2022’s Market, Anthony identifies best practices that successful lenders are deploying in the secondary market to reduce the impacts of margin compression on their bottom lines.
Balance profitability & rates
Whether you’re selling loans on a mandatory or best efforts basis, it’s vital to scrutinize and adjust your margins to find the correct balance between profitability and competitive rates.
“With loan volume falling, many lenders may be tempted to price their loan products aggressively to drum up borrower interest,” Anthony notes. “By falling into this knee-jerk, reactive mindset, though, lenders may inadvertently reduce their margins to the point of losing money and impacting overall profitability.”
Keep an eye on margin targets
When it comes to maintaining margin targets, lenders with an analytical, deliberate mindset hold a major competitive advantage in today’s market. By understanding the danger of taking on too many loans at a low margin, they’re able to proactively set their margins at levels that support profitability. Then, they can set rates that reflect margin targets, protecting their bottom line even if they lose out on borrower business.
Meanwhile, by keeping tabs on their competitors and pricing their offerings reasonably—but not aggressively—they ensure they remain a viable option in the marketplace. This balancing act requires repeated examination of the competitive landscape, market environment, and per-loan profitability.
Manage pipeline procedures
Lenders can also benefit from taking a closer look at their pipeline operations and procedures. Over the past two years, some lenders may have gotten used to offering borrowers extensions for little or no fees in an effort to capitalize on volume. With today’s market volatility, the cost of those extensions is very expensive.
“Lenders looking to bolster their bottom lines are beginning to charge for extensions or prohibit them altogether,” says Anthony. “Now is the time to tighten up the process, avoid timeline delays, and ensure a fast, consistent experience across loan products.”
Evaluate your investor bench
One way to get a better deal in the secondary market is to expand your list of investors. By adding new investors to your pool, you increase the competition for your loans and can generate better pricing when you sell. By evaluating additional options and taking advantage of the best price, you can mitigate the impact of margin compression.
When pursuing more competitive pricing, lenders should also evaluate secondary market solutions that provide scale and benefits usually only accessible to large industry players. Maxwell Capital, for example, acts as a dedicated investor to expand access to the secondary market, improving execution and increasing revenue per loan.
Trust your partners
Across these secondary market strategies, Anthony has seen lenders finding success most often when they leverage their partnerships and seek the expertise of industry veterans.
“The secondary market is complex, nuanced, and based on complicated computations and data modeling. In challenging market cycles, lenders shouldn’t hesitate to lean on their third-party providers, solutions partners, and trusted advisors,” he comments. “Within our Maxwell Capital division, for instance, we spend a lot of time analyzing metrics and trends related to the secondary market. We’re happy to guide our clients to the best strategy in this area because we view the local lending segment as a community—we help each other out through market highs and lows.”
Looking for more strategies to take on 2022’s challenges?
Download our new eBook Mortgage Experts Take on 2022’s Market for tips and insights from industry veterans with decades of experience handling the pressures of market volatility. There you will find:
- Advice from industry experts on how local lenders can succeed in today’s environment
- What the most agile, innovative lenders are pursuing in 2022
- Strategies to consider throughout all stages of the origination process
- How to gain efficiency, improve margins, and protect profitability
- Visualized metrics that describe today’s challenging market
Get your free copy of “Mortgage Experts Take on 2022’s Market”