From the Curinos webinar, “A Lender’s Guide: Informed Margin Management” on June 18, 2024. The webinar featured John Sayre, vice president, Client Success, and Alexandra Jacobson, manager, Mortgage.
If a lender’s volumes are up 10% this month from last month, is that good or bad? That depends on what the market’s doing, and that’s where informed margin management comes in handy.
In the wake of its deregulation in the late ‘70s, the airline industry was the first to adopt the concept. Anyone searching flight fares can appreciate – or curse! – the sophistication that has led to in its algorithmic pricing that’s based on real-time demand for a perishable supply. But the mortgage industry lagged until Curinos introduced LendersBenchmark Analyzer in 2005, which gave lenders real-time market data, effectively enabling price optimization by matching an institution’s priorities to market conditions.
What follows are considerations for how home lenders can effectively put data-fueled informed margin management to work for them.
Informed margin management is the intersection of market share monitoring and go-to-market price decisions.
Market share monitoring tracks market share by product, regional and purpose and its sensitivity to changes in price, rate and margin. Price-positioning monitoring determines the optimal price strategy benchmark and is periodically reviewed for loan level pricing adjustments (LLPAs), price exceptions and strategies by region. At the intersection is informed market management, which optimizes the relationship between them – whether that means increasing share while decreasing margin or the opposite.
What is Informed Margin Management?
Think of the ideal margin management journey in four stages.
- Identify current go-to-market pricing and origination positions.
- Establish the desired position through price testing.
- Maintain the position through regular monitoring of originations and market comparisons.
- Consider factors that could impact margin, like origination fees, price exceptions, low-level price adjusters and regional pricing.
Todays Margin Management Journey
Stage 1: Identify current position.
Lending isn’t a zero-sum game. Products, purpose and geographic markets all need to be optimized. To do so, lenders need to dig deep to understand the symbiotic relationship between price position and market share based on the behaviors of the markets’ best practitioners. The three main tenants are volume, share, and how rate diverges by product and location. In determining current position, the question to ask is: For what products do I have the most, and least, competitive rate distance and how does that influence market share? Knowing the relationship allows lenders to play out scenarios for higher share and better rate positions (see chart).
Another useful concept is weighted-average market price, or WAMP, which adjusts an indicative market price according to actual market originations at the lender level. By weighting market prices based on what’s actually being originated, rather than market hearsay, WAMP provides a more accurate reflection of market behavior.
Market Share by Rate Distance by Product (Illustrative)
Stage 2: Establish desired position.
Identifying the current position then helps inform that next phase, which is the desired position: Where do we want to go from here? Do we increase margin recognizing that may have an impact on market share or decrease margin to increase market share? Best practices typically conduct some sort of price testing – by product and geographies – to more intricately understand how different products, regions, purposes react to changes in margin. From there, lenders can determine what the best price strategy is for them – but only if they have line of sight to begin with.
Line of Sight can Help Determine Desired Position, by Product and Geo
Top 5 Products
Top 5 States
Curinos LendersBenchmark
Stage 3: Maintain position.
Maintaining the desired position requires biweekly, weekly or even daily monitoring of originations against the total market, which, again, requires line of sight. That allows for ongoing observation of price positions in near-real time, which is the leading indicator of changes that may follow. As a lender’s competitiveness improves, its share will increase, but at what cost to margin?
Stage 4: Monitor other impactors to margin.
When was the last time you reviewed your origination fees? This is one of the factors that can have the greatest impact margin (see chart). Here are some key questions to ask:
- Do my fees vary based on region, product or purpose?
- What informs how I change fees?
- How do I optimize my fees to maximize margin and market share?
Origination Fees: A Key Lever in Managing Margins
Another factor is price exceptions and concessions. Again, some questions to ask:
- What’s the net impact of my price-exception activity?
- Is it exposing me to any potential fair-lending challenges?
- What branches give away the most of it?
- How can monitoring price exceptions affect overall margin?
Finally, loan-level price adjusters (LLPAs) can be major factors in influencing risk-based pricing. Consider these questions:
- When was the last time I assessed my LLPAs?
- Am I being adversely selected because of my LLPAs?
- What informs my position when I change LLPAs?
- How do I optimize my LLPAs to maximize margin and market share?
LendersBenchmark Analyzer makes it possible.
If someone were to apply for a home loan tomorrow, thanks to Curinos’ LendersBenchmark Analyzer, there’s a 60% chance that we’ll know everything about the transaction within a week of the application. Of course, we anonymize that data and create a benchmark for the benefit of our clients. That sort of near-real time data enables informed margin management, which, in turn, can facilitate better and quicker decisions about pricing and managing an institution’s mortgage lending at large.
