Loan product rollouts are often viewed as origination efforts, but capital markets teams that work to do things like ensure such efforts have appropriate investor support can make a difference in how well they go too.
"The secondary market is absolutely essential," Bob Broeksmit, president and CEO of the Mortgage Bankers Association, said at a conference dedicated to the topic in New York, noting that professionals in that area help safeguard lenders' liquidity and stability.
What follows are accounts in which National Mortgage News asked three
Piloting concepts
Not every lender gets involved in production innovation, and for those that do there are a lot of considerations. These include whether a loan concept might fit in with existing guidelines that government-sponsored enterprises and the Department of Housing and Urban Development have.
"A large part of the process is having discussions with the GSEs, explaining the concept, confirming what you think meets the guidelines, and where you think you might need a waiver," said David Battany, executive vice president of capital markets at Guild Mortgage. "That can take a year plus and it might not fit with their objectives and go nowhere."
Similar discussions may be held with private investors with an appetite for mortgage investments such as insurance companies, credit unions, banks or bondholders.
"You might have to find out what their obstacles are, then maybe you have to modify your original concept to be able to make it eligible or palatable to investors. So it involves a lot of problem solving," he said.
Battany said he had a role in helping to launch pilots for two new products at the company recently that aim to address housing affordability hurdles.
One pending pilot allows a person to buy a property and to effectively finance one-third of the acquisition with a lease, and the other two-thirds with a traditional mortgage.
The homebuyer would pay a transferrable lease rate of about 5% and they can buy the land back at any time over the next 50 years for the original purchase price adjusted for inflation. The inflation rate is based on the Consumer Price Index.
The monthly payment savings on this product is about $300 a month compared to buying the same property compared to a traditional mortgage. The borrower has the option to use a rate-and-term refinance to convert the leasehold into a traditional fee simple property.
Capital markets support for the product included identifying investors that would be interested in the product due to its inflation adjustment, which has parallel with the Treasury inflation-protected securities market.
"For insurance companies or any other investor who wants a nice hedge against inflation it's an interesting structure," Battany said.
Another loan program Guild has piloted involves a partnership with Homium, a technology company that works with nonprofits and other organizations to provide down payments through shared appreciation loans.
"They bring in 30-40% cash and they give you a second lien with zero monthly payment for the same amount of the home's value. So your monthly payment compared to a normal mortgage is reduced by 30-40%," Battany explained.
In exchange the borrower must agree to return 30%-40% of future home price appreciation to Homium when the home is sold or earlier, potentially through a refinance down the road when they may have more income to qualify for fully amortizing mortgage.
"What you're doing is taking part of your future wealth you would create as a homeowner and using it now, at a time when it's pretty valuable to have a little bit more monthly income for routine home expenses or build up cash for emergencies," Battany explained.
Part of testing the product's viability involves knowing how to match it with government-sponsored enterprise requirements to help ensure investor demand.
The enterprises allow seconds funded through nonprofits to be used for down payments for a first lien they are buying at origination, so long as the subordinated debt meets the guidelines of Fannie Mae's Community Seconds program or Freddie Mac's equivalent.
Battany said Guild examined product options with private investors outside the GSE market but found they weren't the right fit for the company's business strategy.
The challenge in this case, once that was determined, involved finding nonprofits to get involved. The downpayment investor's return is limited to how the home's price changes over time, which may be in the single digits, and there is risk the second lien may not perform.
"It's not an exciting investment, but the social impact of increasing homeownership can be compelling to these nonprofits," Battany said. "There are, however, discussions going on in Washington about making these payoffs to investors be tax exempt. This could be a more exciting investment than the 2% or so offered in the tax free market."
Detroit Piston basketball player and local philanthropist Tobias Harris recently funded the first loans in the pilot program in partnership with Homium and Guild.
Onboarding investor products
"I think what's key is making sure loan officers can compete," said Todd Leddon, executive vice president and chief capital markets officer at LeaderOne Financial. "There's enough variation in the market based on what investors already have."
Capital markets professionals keep in mind that onboarding new investor products helps with loan officer retention and serves LO referral partners like real estate agents too.
Ways to mitigate certain risks in product adoption can include doing only nondelegated business partnerships in which the investors retain the decision making power for accepting loans.
"That way, they can help guide you," said Leddon, who also authored a book on mortgage capital markets strategies.
There are tradeoffs in deciding to do this instead of delegated underwriting, where the originating lender takes on the responsibility for the loan decision, and one is that capital markets professionals have to ensure they find investors with good customer service.
"Service is important to make sure you manufacture it right. I'm talking about making sure your investor has people who understand the product and the guidelines so they can provide service to the loan officers," Leddon said.
Capital markets professionals ideally also check in with the full range of operations to get a sense of a product's manufacturing risk, from whether the loan origination system accurately reflects the loan's guidelines, ensuring the servicing is in order and compliance is in place.
"If you get the manufacturing of the loan right, you're actually going to be able to make money, and that's the whole point," he said.
One example of where compliance comes into play can be found within the universe of investor loans made outside the qualified mortgage definition, which some private loan buyers offer. Some of these loans have prepayment penalties, which may face state restrictions.
"You also have to make sure that you get the disclosures right when these loans go into securities eventually or if they go to an insurance company," Leddon said. "There's a lot of making sure that we're going to manufacture the product accurately."
Capital markets professionals also have to consider that private investor pricing and appetite for loans can be less stable than when working with government-related agencies like Fannie or Freddie Mac. Private investors may make other loans and their mortgage appetite may vary.
Some private investors may temporarily shut down their rate-lock desks when new uncertainty arrives in the market, with some did for a period at the outset of the Iran War and the 2020 pandemic. Having multiple investors with strong service to turn to can help if one drops out.
"You want to make sure you have some outlets. It's very important to have some liquidity for whatever you are adding as a product," Leddon said. "Otherwise, you're stuck with the loan, it goes to the
For loan sellers with a limited appetite for risk and hedging, best-efforts delivery for private investor loan programs may be preferred in some cases. Best efforts delivery generally makes the investor responsible for the risk that the loan may not close and fall out of the pipeline.
"Not everybody is hedging non QM. They're often only going 'best efforts' because it's too hard to predict when the market will move," he said.
Generally a new agency loan product from Fannie Mae or Freddie Mac is easier to bring online than a private investor, but sometimes they do have quirks that can complicate the process when selling through another company's correspondent channel.
"You can have a challenge when they do something that has to do with closing costs or another very specific situation," Leddon said.
Fannie and Freddie have had programs where very-low income purchase loans offer a $2,500 credit that goes to the borrower. In rolling these out, one complication was that selling the loans through a correspondent investor caused a challenge unless servicing was retained.
The solution to finding a way to handle this without retaining servicing was to sell the loans on a co-issue basis where the servicing is sold simultaneously to a separate investor.
Delivery risk and pricing
Companies that get the most out of their capital markets strategies related to offering a particular product look far beyond what that highest price they can get for it at a particular time is.
"There are a lot of companies that just say, 'I'm going to grab all my competitors' rate sheets and throw them in my pricing engine. My loan officers can just pick the best price and we're going to move forward,'" said Chris Bennett, chairman of Vice Capital Markets. "That might be the easiest thing to do, but it is not at all the thing that maximizes profitability for the lender."
Bennett, whose company is a specialized mortgage hedge advisory firm, cited the example of deciding whether to offer and how to price a small-balance mortgage that
Most of the time, selling such a mortgage into a spec pool is attractive because of the premium available, but there are other considerations, such as the fact that addressing the pipeline hedging risk involved is more complex than in the to-be-announced market.
In the more liquid TBA market, risk is linked to how rates change during the origination process and can be addressed with more generic hedges. Spec pool risk is more about how the prices offered in that market shift over the course of the loan's origination.
"There are different philosophies between different lenders as to whether I take these pay ups that I hope I'm going to get in two months when the loan is closed, and do I factor that into my pricing?" Bennett said.
In addition to considerations around pipeline risk and competition, capital markets strategies ideally factor in specific manufacturing costs for a particular product based on the company's business model, loan channels and how servicing is handled.
Small loans typically have less sizable profit margins than their larger counterparts.
"Let's say that if I have a spec pool that's made up of loans with balances of $110,000 and below, and I get an extra two points for that. I have to consider, as a lender, whether I pass that two points on to the pricing to my customers, or do I keep that to myself as part of my margin because it's really hard to make any money when the loan size is so small," Bennett said.
On top of all this, competitors' rate sheets do remain a consideration, so capital markets professionals also may have to look at whether a company can match or beat them while still remaining profitable, or if the business can afford to price the loan as a loss leader if needed.
