In the last article, I referenced how we might be able to mathematically make two loans equal through the use of math in our technology platforms. After all, we use pricing engines to direct our rates, set our policies and distribute those rates and prices to the consumer, or one who works with the consumer.
So, then isn’t it possible that we could somehow make all loans equal by accounting for these adjustments? Sure does sound complex, but if you think back 20 years ago, pricing wasn’t as easy either because we had data all over the place.
Before we start with equalizing loans with Math, we have to remain on some of the basics and continue to break down the process. In Part One I talked about pricing overall. In Part Two I broke it down to the “knowns” and the “decisions made”.
Before we understand how to compare two borrowers (variables) we need to understand the impact of decisions made. I like looking at one borrower who has options to make different decisions. This makes the concept of comparing borrowers eventually, easier to understand.
The Mortgage Banker has received their pricing for the day from their secondary market investors. They have built in their corporate margin (profit) as well.
These are the rates the Loan Originator sees:
Same Day, Same Time, Same Program, No Risk Adjustments.
3.750 = 99.00
3.875 = 99.50
4.000 = 100 (Par)
4.125 = 100.50
4.250 = 101.00
4.375 = 101.50
4.500 = 102.00
4.625 = 102.50
4.750 = 103.00
- I can finance my conventional LPMI-Interest Rate = 4.75%
- I’ll pay monthly conventional PMI but do not want to pay points-Interest Rate = 4.0%
- I am a little short on closing costs so a lender credit of 150 basis points (1.5%) would get me over that hurdle-Interest Rate = 4.375%
- I plan on staying in this house for a long time so while rates are low I will pay 100bps (1%) for a lower rate-Interest Rate = 3.75%
In reality, the same borrower, with the same risk adjustments, same program, same geographical area and at the same time of the day could receive a rate of 3.75%-4.75%! That is a 1% swing in rate simply caused by a decision they made based on their level of comfort.
This pricing disparity had absolutely nothing to do with the client on a prohibited basis. Remember, the example is based on the variations of one client.
So let’s take this one step further and turn the one borrower into 4 different borrowers.
- Borrower “A” chose financed conventional LPMI because it was less expensive each month. Rates are low so that works for them. The lender showed them the difference in monthly payment and overall interest cost so they could make an educated decision. Rate=4.75%
- Borrower “B” was rate sensitive and would rather pay the PMI monthly. They make more money each month than borrower “A” and want to pre-pay the loan faster to eventually eliminate the PMI. The loan originator gave this borrower access to an amortization calculator so they can determine how to pre-pay their mortgage to achieve their goal. Rate=4.0%
- Borrower “C” has done a great job of saving for a down-payment but is a little short on closing costs. They like the idea of paying a little bit higher in interest rate and not feel so cash strapped when they move in their new home. So, they select that 150bps lender credit and pay a little more in interest rate. The lender showed them their options both in the payment and overall interest costs of their decision. Rate=4.375%
- Finally, Borrower “D” is a move-up buyer and this is their permanent home. They have enough to pay a little extra to get the lowest rate available, and still have a little cash left over for the move. Rate=3.75%
Did the lender discriminate because there is pricing disparity? Stay tuned for Part Four!