Reverse Lenders Transition to Mandatory Live Pricing - Technology Solutions That Could Save Your Business

Last Updated on Tuesday, 22 September 2009 10:33 Written by Brad Thompson Wednesday, 25 March 2009 08:09

To remain competitive in today’s market, reverse mortgage lenders are feeling the pressure to embrace the new mandatory live pricing requirements recently introduced by Fannie Mae.  With private investor purchasing and proprietary portfolio products going away, lenders will find it difficult to ignore Fannie Mae’s new pricing requirements; however, incorporating the new mandatory live pricing and delivery requirements into their pricing strategy opens lenders up to exposure, and increases the risk and challenge of correctly pricing and delivering loans.

As companies start to adopt this new business model, one that reflects the already familiar forward secondary market commitment and delivery process, many lenders will find themselves behind the curve when it comes to the ability, knowledge base or technological infrastructure to support this new process.

Enterprise Lending Solutions can significantly reduce this risk by providing Reverse Lenders with advanced technology, commitment tracking, business workflow and industry knowledge and expertise that provides a comprehensive and streamlined approach to mandatory live pricing and delivery.  A solution that puts reverse lenders in a position to minimize risk, optimize market opportunities, while competitively pricing reverse loans to the broker base.

Market Drivers Impacting Reverse Lending Pricing

As stated in the August 1st, 2008 Reverse Mortgage Lender Letter 2008-2 “Effective November 3, 2008, Fannie Mae will accept for purchase closed-end, fully drawn fixed rate HECM’s that comply with all relevant Housing and Urban Development regulations and guidance.”

Starting in November of 2008 Fannie Mae announced it was eliminating the need to convey pricing every 60 days through forward negotiated commitments in favor of the new mandatory live pricing model.

“Fannie Mae’s new eCommitting process introduces “live pricing” for reverse lenders with commitment periods from as few as two to as many as 90 days.  Lenders will obtain a reverse mortgage price via the eCommitting application for the current business day by selecting the following:

• Reverse mortgage product
• Net margin (ARMs) or pass through rate (fixed-rate)
• Commitment period, and
• Commitment amount in dollars (based upon unpaid principle balance at time of loan closing).

Fannie Mae’s eCommitting will generate a commitment number and expiration date and will lock-in the price for the chosen parameters.  Lenders will be obligated to deliver a loan (or set of loans/pool) with the specific parameters input at commitment (e.g. reverse mortgage product, net margin/pass through rate, commitment period, and commitment amount).”

This now introduces mandatory pricing and pair-off, over delivery, and extension requirements that reverse lenders must adhere to.  According to Fannie Mae in the August 1st, 2008 Reverse Mortgage Lender Letter 2008-2 regarding reverse mortgage ARM’s: “In order to give Lenders time to adjust to the new live pricing process for reverse mortgage ARM’s, which includes mandatory commitments, Fannie Mae will not initially enforce the standard pair-off and over delivery requirements typically associated with mandatory committing, and extensions will not be available.  Fannie Mae will provide Lenders with 30 days prior notice of their plans to begin enforcing their standard pair-off fee, over delivery and extension requirements for reverse ARM’s.  Fannie Mae will monitor all commitment activity and performance during this initial period which began January 1st, 2009 with a target date of April 1, 2009.”

“For fixed-rate HECM’s, the standard pair-off, over-delivery and extension requirements and fees applicable to whole loan commitments per the Selling Guide will apply as of November 3, 2008.”

To finish out 2008 many lenders took one last 60-day forward commitment and locked in their pricing for the remainder of the year. Now, in 2009 reverse mortgage lenders are forced to radically change from a fixed pricing basis and move to a mandatory live commitment and delivery method of pricing and selling loans.  The majority of reverse lenders simply do not have the technology or expertise required to properly price, track or deliver these commitments in order to secure the required margins and stay competitive in this space.
  
By enacting a live pricing process and participating in a secondary market modeled after the forward world which now includes mandatory pricing and pair–offs, over-delivery and commitment extensions, there are now potentially millions of dollars at stake for gain or loss depending on how effectively these commitments are handled by reverse lenders.

The Challenges of Mandatory Live Pricing

Mandatory live pricing is changing the face of reverse lending.  It is critical that lenders gain an understanding of the process and the risks associated with effectively managing their commitments and deliveries.  Overall, profitability and success will only be achieved with a thorough understanding of the mandatory margin and rate lock process, pair-offs, over-delivery, and commitment extensions as well as the risks associated with the non-delivery of prior commitments.

Lack of Experience

The shift to mandatory live pricing is a dramatic change to the way lenders who specialize in reverse mortgages do business.  The move to mandatory live pricing clearly demonstrates that the reverse mortgage industry is transitioning itself to the secondary market that currently exists on the forward side of the mortgage industry.  This significant change impacts the entire business model of reverse lenders and requires knowledge and expertise that most reverse lenders simply do not have on staff at the current time.
 
There is also a lack of experience by many of the technology vendors in the reverse mortgage space who have solely focused on the reverse mortgage side of the business.  While this may have been viewed at one time as a competitive advantage, it is now a significant limitation.

Those vendors are experiencing the same learning curve as reverse lenders when trying to understand the nuances and complexities of mandatory pricing, which includes tracking, delivering commitments, pair-offs, over-delivery, and extension commitments. Introducing new functionality into an already existing technology platform can be difficult, tedious and time consuming for technology vendors as well as invasive and potentially destructive for those lenders trying to implement it.

New Business Paradigm

Before the change to live pricing, Fannie Mae only priced reverse mortgages in 60-day forward negotiated commitments based upon reverse mortgage delivery.  Fannie Mae now allows lenders to obtain reverse mortgage commitments ranging from 2 to 90 days.

Lenders will now need to distribute daily rate sheets with loan-by-loan margins.  The proper tracking and delivery of these commitments, while managing the lender’s pipeline, is vital to the success and sustainability of the organization.

This includes the managing and tracking of the lender’s pipeline to evaluate loan margins, best deals “best fit”, and slotting loans daily to effectively meet mandatory delivery commitments.  In addition, lenders must be able to manage fall-out in real time within their pipelines.

Once again success and profitability will be determined by a lender’s ability to effectively manage this new process, implement automation and utilize business rules and pipeline management to meet mandatory commitments.

Risk Exposure (Potential Fee Increases)

Mandatory live pricing that is not done correctly exposes lenders to heightened risk and the potential for fee increases with Fannie Mae.  For example, as stated by Fannie Mae, “Pair-offs are used to repurchase all or part of a mandatory delivery commitment when customers are unable to deliver the committed dollar amount.  Whole loan prices captured at commitment and again at pair-off are used to determine if a pair-off fee will be due, and the amount of pair off.”

“Over Deliveries- occasionally, a lender will be faced with an extenuating circumstance that may justify our allowing them to deliver more than the maximum delivery amount, although we will authorize only one over delivery per commitment.  This may occur when a consumer lowers their down payment or when a mortgage is substituted to prevent or reduce a pair-off fee.  Whole loan prices at commitment and at over delivery are used to determine if an over delivery fee will be due.”

Fannie Mae also states “Commitment Extensions are calculated based on the outstanding commitment amount at a flat per diem cost that does not fluctuate with market movements.  Since the cost per day to extend does not change, it is recommended that you take the minimum number of days necessary to deliver a commitment.  There is no refund on additional days extended, but not used.  A commitment may be extended for up to a maximum of 30 days from the original expiration date.”

Managing and tracking the pipeline for fall-outs, slotting loans, delivery and making the correct commitments in real time is not a knowledge base or automation technology that most reverse lenders have at this time, which will ultimately prove to be very costly if lenders remain idle.

The Solution: True Enterprise Lending Solutions

To overcome the new requirements and lack of expertise for reverse lenders to engage in mandatory live pricing strategies, lenders are turning to true Enterprise Lending Solutions. At their core, true Enterprise Lending Solutions reduce risk while achieving an improved return for correctly tracking and delivering loan commitments.

With true Enterprise Lending Solutions, reverse lenders can successfully meet the requirements to engage in live pricing, and significantly improve their commitment tracking and delivery success rate by incorporating comprehensive technology and data analytics to address these challenges. Technologies employed include comprehensive pipeline and commitment tracking as well as effective rules-based analysis, automated workflow, extensive real time management tools and comprehensive vendor experience with commitment tracking, delivery and secondary marketing activities.

On-demand rules-based analysis needs to posses the ability to look at the existing pipeline, daily loan margins, current commitments, pools and status of lender defined criteria to effectively track all pricing and locking activity.
Automated workflow is central to true Enterprise Lending Solutions.  The solution should ensure both data and document driven workflow.  Automated messaging, document generation and distribution, task queuing with auto-resolution and real time management monitoring and visibility in functionality that should be offered as standard with any true enterprise solution.  Fully integrated document imaging and tracking combined with industry knowledge and expertise will lead to a more streamlined approach.

The technology provider should have extensive forward and reverse expertise.  As the reverse mortgage industry is transitioning itself to the secondary market model that exists in the forward business, reverse lenders can no longer rely on technology vendors whose experience is limited solely to the reverse side of the business.  Reverse lenders need to engage and interact now more than ever, with a vendor that has the knowledge and experience to help guide them through this significant change in reverse lending.

Important Benefits

A number of significant benefits emerge when advanced technology automation, data analytics, real time commitment tracking, pipeline monitoring and extensive industry knowledge are combined to form a comprehensive true Enterprise Lending Solution including:
       
Enhanced Consistency:  True Enterprise Lending Solutions create a comprehensive and streamlined approach that creates greater consistency in commitment tracking and        delivery.  This is even more critical in today’s challenging market as lenders are tasked with doing more with less. Add on the additional pressure of live pricing and without consistent approach, lenders are sure to make costly     mistakes.

Real Time Information:  Provides lenders with the right information at the right time to make informed decisions. Decisions that take into account all of the variables (net     margin, pass through rate, commitment period, commitment amount, etc) involved with mandatory live pricing to successfully track, commit and delivery loans profitably.

Greater Accuracy:  In dealing with mandatory live pricing the stakes are already high to mitigate risk, eliminate costly mistakes and reduce loss severity.  That is why the accuracy,     validity and speed at which lenders can access, analyze and feel confident in the accuracy of the data in their pipeline, and commitment obligations is absolutely vital.

Gain Expert Advice:  With heightened risk exposure, potential for increase in fees to Fannie Mae, having a partner that delivers comprehensive knowledge and understanding of both the forward and reverse lending channels is imperative.  Engaging in mandatory live pricing without the proper understanding and technology tools is simply not prudent.

Confidence:  Enterprise Lending solutions that provide reverse lenders with enhanced consistency, real time information, greater accuracy and expert advice from a trusted and knowledgeable partner allows reverse lenders to feel confident knowing their commitment tracking and delivery is taken care of.
   
What Reverse Lenders Need in an Enterprise Lending Solution

• Extensive Commitment Tracking
• Superior Technology on One Comprehensive Platform
• Pooling & Delivery Capabilities
• Data-Driven Workflow Automation
• Pipeline Management Tools
• Advanced Electronic Document Management & Imaging
• Extensive Forward & Reverse Knowledge & Support

What to look for in a True Enterprise Lending Solution

When looking for a true Enterprise Lending Solution provider, be sure to consider the following requirements:

Extensive Commitment Tracking:  When incorporating advanced technology, data analytics and extensive industry knowledge to live pricing strategies, lenders will gain    maximum pipeline tracking options to deal with these new requirements. This will provide greater flexibility in dealing with the current and ever changing market conditions.

Superior Technology on One Comprehensive Platform:  Seek a solution that provides full end-to-end loan management functionality for both forward and reverse lending which includes commitment tracking, pipeline management, automated decisioning, business rules management, product and pricing, data driven workflow automation as well as electronic document management.

Pooling and Delivery Capabilities: Maximizing pipeline value while also taking advantage of investor requirements for specified pools has always been a secondary marketing challenge whether forward or reverse.  Utilize a powerful rules engine that models business processes within a rigorous optimization analysis. These rules can incorporate eligibility and aggregation constraints, as well as expected pay-ups, to achieve optimal loan slotting. Utilize a variety of loan delivery vehicles— security and cash, specified pools, etc.

Data Driven Workflow Automation:  Having one centralized location for maintaining rules, security, products, and workflow are key to workflow automation. This eliminates problems of synchronizing multiple systems, thus reducing the time required to add products, change processes, and  adapt to the competitive landscape. It also provides the ability to quickly and easily access data required by your customers. The solution should offer sophisticated data driven workflow automation (powered by a robust Rules Engine) including auto-resolution capabilities that greatly improve efficiencies, mitigate the need for additional training and deliver a significant increase in employee productivity and customer service.

Pipeline Management Tools:  Being able to view your pipeline in real time to determine your current market position, tracking your commitment period and amount of commitments is vital.  Effective pipeline management tools also allow for fall-out tracking to ensure that commitments are properly met.  Managing your pipeline to avoid unnecessary fees and or additional steps such as pair-offs, over-delivery and commitment extensions is critical to the future success of reverse lenders.
Advanced Electronic Document Management & Imaging: Look for a solution that can capture any document from anywhere, utilizes Optical Character Recognition (OCR),   efficiently indexes and stores documents, automates events, actions and data analysis, retrieves specific documents for specific tasks and views and annotates documents.  This creates an electronic audit trail, eliminates re-keying of data and ensure greater data quality and consistency.

Extensive Forward & Reverse Knowledge & Support:  Find a company that will partner with you for the long-term.  One that understands the full spectrum of industry issues in both forward and reverse as well as offer the best mix of solutions to meet the needs of your business.  The company should provide consulting, technology implementation, training, support and in depth industry expertise. Experience and expertise in dealing with mandatory live pricing on the forward side provides great insight, best practices and proven solutions that are ready for market now.  Don’t risk working with a reverse vendor that is learning the ropes along with you, your business is too important to take that type of risk. 

The move to mandatory live pricing clearly illustrates that the reverse mortgage industry is transitioning to the secondary market-pricing model that currently exists on the forward side.  This includes the ability to effectively: price, lock, commit, deliver, and track all of this secondary market activity for reverse lenders. This presents opportunities to deliver more competitive pricing and increased margins, but it also significantly increases risk and loss severity when commitments are not tracked and delivered correctly.

Traditional thinking and looking to familiar sources (current reverse vendors) that focus solely on the reverse business is not the answer when trying to deal with this dramatic change in how reverse mortgages are priced.  Enterprise Lending Solutions that deliver both forward and reverse automation for commitment tracking and delivery, backed by experts who have been producing mandatory live pricing solutions to lenders nationwide for many years, is the most prudent direction to go.

As reverse lenders transition to mandatory live pricing, there are technology solutions and solution providers that could save your business.  The time for reverse lenders to embrace Enterprise Lending Solutions that handle both forward and reverse mortgages is now.  Your business simply cannot afford to not handle mandatory live pricing correctly.