Extract
Pricing for profits.
Pricing mortgages off the screen is not the way to make profits. Mortgage bankers must factor in the other key variables that together determine the profitability of their pricing.
In days past, when there was less competition and lower rate volatility, secondary marketing performance bench marks were often very simplistic. The mandate frequently was to break even in terms of security execution, thereby leaving 50 basis points of servicing on the table as "gravy." An occasional month of secondary marketing losses was tolerated--after all, gross profit margins were high, and servicing assets were valuable enough that small pieces of the servicing portfolio could be broken off to subsidize secondary marketing losses. And, if there was a thrift or banking parent, it may have been possible to bury losers in the portfolio. (This strategy never made economic sense, because unreversed market-value losses, by definition, come back over time in the form of reduced earnings.) Today, all-in spreads are much narrower, and interest rates are more volatile, so mortgage bankers who manage their operations and their risks more effectively are building a formidable advantage over loosely ...See the full content of this document
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