Pricing at the point of sale: are lenders leaving loans on the table because of limitations in their front-end origination systems? Here's an argument for putting a pricing engine at the point of sale.

Author:Ehring, Dain
Position:Need to introduce technology in mortgage industry

MOST LENDERS TALK ABOUT CONVERSION OR PULL-THROUGH, INSTEAD OF sales, as a measure of business effectiveness. Conversion is the percentage of funded applications from total legitimate applications received. In a steady interest-rate environment, a conversion rate considered a great number by many mortgage executives is 80 percent. But does anyone ever ask what happened to the other 20 percent? More important, what happened to the leads that never became applications at all? [??] Examine any sales organization, and you will see that technology tools are often ignored. Sales organizations care about the top line. Technology is about the bottom line, or so they assume. Telephone and fax machines are the primary infrastructure. [??] For retail lending channels, point-of-sale software is used to acquire applications; it then loads them into a back-office loan origination system (LOS) for processing. Only the largest lenders are using an Internet point of sale system for their wholesale channels. And only a handful of avant-garde lenders are at the forefront of the trend to use a pricing engine, previously relegated to the back office, as their sales tool of choice. [??] Interestingly, for the 12 months that ended in the fourth quarter of 2004, only three of the top 10 wholesale originators gained more than a full percentage point of market share in any given quarter, according to National Mortgage News. Two of these companies were Chase Home Finance, Edison, New Jersey, and GreenPoint Mortgage, Novato, California (whose growth was almost an order of magnitude higher than any other wholesale lender, according to National Mortgage News. Overall in 2004, wholesale origination volume dropped 27 percent over 2003, and a market share point gain equaled $2.3 billion in new loan originations.

What do these two organizations have in common? At the most basic level, Chase and GreenPoint have both cultivated a culture where the needs of the customer are given primacy, and mortgage products are actively sold rather than passively originated. There is one more thing: To advance their sales and marketing goals, they have deployed technology that brings their most important selling tool--the pricing engine--to the point of sale.

The best tool for selling is a pricing engine

As the repository for a lender's products, pricing, investor-eligibility requirements, exceptions and stipulations, the pricing engine is often the single best sales tool available. For many organizations, this engine is simply a big spreadsheet or table that is loaded into the LOS and then distributed as rate sheets and underwriting guidelines. Staff members in a lender's secondary office maintain these tables. For most companies, this is a back-office function. And for those interested in selling more loans, that is a big mistake.

A pricing engine belongs where the sales are--in the channels. GreenPoint has two pricing engines: one embedded in the loan origination system and one in the front office supporting all of the company's channels. This gives GreenPoint the flexibility to experiment with new products at the point of sale, which it does on a regular basis. Management meets on a weekly basis to discuss new product and pricing strategies. The best ones are implemented on a trial-run basis; those that prove successful can be quickly rolled out across the company.

Of course, mortgage lenders won't invest in technology products unless the return on investment (ROI) is immediately obvious. What's more, that ROI frequently has to be achieved within the first fiscal year. For this reason, putting a pricing engine in the sales channel requires enlightened thinking on the part of management, and a willingness to invest on the part of lending leadership.

Consider Guaranty Bank, Dallas, which focuses on negative-amortization adjustable-rate mortgage (ARM) loans for its portfolio. Historically, the bank relied on printed documents to guide its salespeople through the process of determining eligibility. While there were generally seven to 10 levels of conditions...

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