Tech Talk

TECH TALK

INNOVATION IN THE SECONDARY AND CAPITAL MARKETS

By Suha Zehl

I am neither a secondary marketing executive nor do I play one on TV. But I am a tech geek; and, in previous roles, I had the opportunity to collaborate with other leaders to develop a meaningful secondary marketing strategy.

So, what did I learn in the process?

Well, the first is this: unless you are part of the secondary marketing team, you may not know, much less understand, a great deal about what happens in the secondary and capital markets areas. For most, rate sheets are magically created and distributed, loan officers can demonstrate product and pricing comparisons to their customers, and they are able to lock their pipeline. Loans are re-priced, secondary analysts run comprehensive best execution analyses for optimal loan delivery, and then those loans are sold to investors, yielding the highest economic benefit.

Say what?

For someone unfamiliar with secondary and capital markets workflow, the above paragraph sounds like a bunch of words strung together, right?

Let me break it down for you and define some of the scope of secondary marketing. In doing so, I will then be able to showcase some of the innovations driving the technology evolution that will transform this space. These innovations will drive growth, increase profitability in a compressed margin environment, and improve the overall mortgage process in 2021 and beyond.

First, I should probably provide a definition for what the secondary and capital markets are and are not. In the simplest of terms, the transaction (loan) between the customer (borrower) and the lender takes place in the primary mortgage market. In contrast, the secondary mortgage market is the marketplace where home loans and servicing rights, individually or bundled together, are bought and sold between lenders and investors.

Make sense?

Both areas, primary and secondary mortgage markets, have benefitted from a tremendous amount of digital transformation and automation. In this article, I will focus on the secondary marketing solutions that have transformed this space, solutions like product eligibility and pricing engines (PPE), hedging platforms, best execution analyses, and loan delivery.

Just a few years ago, the entire pricing and lock functions were very manual and relied on “someone” to do “something,” a process prone to errors and potential risk to the organization. Margins had to be managed, rate sheets created then imported into the various systems (POS, LOS), investor guidelines had to be maintained and updated, locks had to be requested then confirmed by secondary, secondary had to verify the lock with the investor, the LOS had to be updated and so on. Throw in mortgage insurance pricing into this mix and some double data entry across systems and you can see how all this can get very complex, quickly. Did I mention that this process was manual, extremely time consuming and rife with errors and delays? Believe me, it was, and it still is for those who continue to perform these tasks manually.

The resource intensive nature of these secondary marketing tasks and activities has created opportunities to deploy technology that will improve operational efficiency, decision making, and competitive viability in today’s uber-competitive environment. As pressure grows to lower costs, improve margins, raise quality, shorten turn times, reduce risk, and sharpen decision making, automating the entire secondary marketing process, from soup to nuts, is the proven path to success.

We have certainly seen a plethora of solutions and providers trying to improve every facet of the secondary marketing workflow with technology and innovation. Lenders today are seeking ways to deploy this technology to create leaner processes with increased automation. In my humble opinion, the following six keys areas should be high on every lender’s strategic secondary marketing roadmap to help drive those efficiencies home.

1) MANAGING AN EVER-EXPANDING PRODUCT OFFERING LINE IN REAL TIME, SEAMLESSLY AND ACCURATELY

As the number of investors continues to grow since the financial crisis of 2008, lenders have to be able to deliver conforming conventional loans and loans that do not fit that definition. Many investors are slowly adding and looking to buy other type of loans (jumbo, non-QM, low-income borrowers, etc.). Lenders who can leverage automation to manage this expanding set of content with high degree of accuracy will benefit and see measurable growth in the years to come.

2) AUTOMATING THE LOCK DESK WORKFLOW TO ENSURE SCALABILITY AND REDUCE ORGANIZATIONAL RISK BY FLAGGING LOAN-LEVEL DATA CHANGES THAT IMPACT ELIGIBILITY AND PRICING

Whether it is helping loan originators lock, re-lock, or extend locks anytime, anywhere, automating the lock function to minimize the number of touchpoints, integrating with mortgage insurance providers for real time pricing, or providing real-time loan monitoring to identify potential eligibility issues or pricing changes. L\enders who implement solutions to automate these and other secondary marketing lock-related functions will realize an unexpected ROI in resource productivity, reduction in cycle time, and most importantly, improved customer satisfaction.

3) IMPLEMENTING A FLEXIBLE AND AGILE MARGIN STRATEGY TO BALANCE COMPETITIVE PRICING WITH PROFITABILITY TARGETS

Dynamic, channel and branch specific, margin management capabilities allow lenders to deliver the optimal price for each product and segment, all while optimizing volume and profitability. Furthermore, because these strategies can also vary by geography (think CA vs. GA), loan type (think purchase vs. refinance, conforming vs. jumbo), and other criteria, margin maintenance can be quite complex hence the need for automation.

4) PERFORMING BEST EXECUTION ANALYSES WITH ADVANCED PRODUCT MATCHING CAPABILITIES TO IMPROVE GAIN ON SALE

According to the Mortgage Bankers Association, MBA, a comprehensive best execution analysis will have a larger effect on profitability than any other single action. The goal is for mortgage lenders to get the best price for the loans they sell to investors. Many of the complex yet repetitive tasks required of secondary marketing have been automated within the new suite of solutions to determine the “best ex” option. From delivery period to certainty of delivery (best efforts vs. mandatory), from method of execution (agency vs. aggregator) to servicing rights (retained vs released), a “best ex” solution must consider all the key factors to ensure maximum profitability while mitigating, if not eliminating, risk.

5) MANAGING PIPELINE RISK POSITION AND EXPOSURE IN REAL TIME WITH THE IDEAL HEDGE SOLUTION

Automation in this area is still at the grassroots stage; however, artificial intelligence (AI) is certainly helping lenders make a huge leap to the next level. There are solutions out there to help lenders model their risk position and production to help manage the pipeline and reduce organizational risk and exposure.

6) GAINING NEW INSIGHTS WITH DATA AND ANALYTICS FOR OPERATIONAL EFFECTIVENESS, COMPETITIVE BENCHMARKING, AND INDUSTRY TRENDS

Now we are talking! Data. Analytics. Dashboards. Yes! Those in the secondary marketing space really need those. Why? Because until recently, they had very little visibility or access to solutions that helped them measure the success of their efforts. It was all done manually or through excel reports. I know, I helped build some of those reports myself. As volume increases, data and analytics will become a differentiator, and lenders who have implemented solutions that provide actionable data and analytics solutions will have the competitive advantage.

The unprecedented origination volumes resulting from historically low mortgage rates are magnifying the challenges for secondary marketing leaders and analysts because of the limited visibility and increased unpredictability in the secondary and capital markets space.

I hope that this article has shed some light on the critical role these functions play and the overall impact they have on profitability. Obviously, technology and innovation, backed by some serious artificial intelligence, is providing solutions that can dramatically and significantly impact the bottom line. By letting technology do the heavy lifting, analysts and leaders can spend more time on strategy, improving efficiency, reducing risk, and making the right decisions.

I leave you with this one thought: whether your organization is in the early stages of adoption or you are currently implementing some of these value-added secondary market automation solutions, make sure what you select aligns with your overall strategy so you can leverage them to optimize organizational efforts.

Suha Beidas Zehl brings over 30 years of global, information technology, and business experience in various industries, most recently in mortgage. Suha started her career as a Programmer Analyst; she has taught at the University level and ran her own successful consulting company before returning to the mortgage industry as an award-winning technology executive and speaker. She is currently the Chief Analytics Officer with Equity Prime Mortgage.