As discussed yesterday in Part One, figuring out the pricing conundrum is difficult for examiners and also difficult for lenders to explain. Part of this is due to the many elements involved in pricing.
The issue then becomes if you don’t explain it well, you may be guilty of pricing disparity even if you know you are not. The burden of proof lies with your company. You have more data than an examiner, so if that data is organized and presented well you out-data the examiner’s data.
Let’s take a look at the bits and pieces of pricing. (basic level not hedging and other advanced techniques)
The Knowns: The Easy Part-This is the easy part because it applies (or should) to each client that fits the scenario. If not, you made an exception and that falls in the “Decisions Made” below. The key is that when you look at your pricing structure internally, ask this question: Are these standardized by product/investor and are they applied equally? If the answer is no, it falls into the “Decisions Made”.
•Risk Adjustment
•Loan Level Price Adjustments
•Corporate Margin
•Fees
•Relock Charges
•Guaranty Fees or Financed Govt. Mortgage Insurance (these are known because they are directly tied to the program selected).
•Servicing Release Premiums (if standardized by product, if not it goes below).
The Decisions Made: The Part That Needs to Be Documented well, because there is variation.
•Lender paid mortgage insurance vs. monthly mortgage insurance
•Lender credit desired/needed to offset closing costs
•Lender credit when there is no Par price
•Loan Originator pricing mistake
•Pricing Exception
•Rate Buy-down from Client or Seller
Defining the Base (Raw) Price:
As mentioned in Part One, pricing comes from many different places and is generally not priced on a Loan by loan basis, except to the origination staff. Demonstrating your secondary marketing methodology requires a company to know their raw price for that loan, at that time, on that day.
Where the Pricing Guidance comes from depends on how your company is set up, and it can be any of these or a combination of these. This gets more complex when you factor in the multiple channels of pricing that come in to one company, which may have varying raw prices. This is very common for most mortgage bankers.
•GSE Sets Raw Price
•Investor Sets Raw Price
•Investor Adds Risk Overlays to GSE Price
•Mortgage Banker adds corporate margin to raw prices
•Mortgage Banker adds Overlays to Investor Price
No wonder an examiner with limited data sets can think you are guilty of pricing disparity when you really are not!
Now the next question becomes, how do you prove no pricing disparity. After all, you can’t mathematically make every loan equal. Or can you? Hmmmmm. You’ll have to stay tuned for Part Three!
