Pull Through

If you don’t measure it, you can’t manage it.

As inflation and volatility continue to drive economic decisions on Capitol Hill, interest rates are anticipated to continue to impact mortgage originations. The Mortgage Bankers Association has forecasted that total mortgage originations will be ~$1.8T for 2023, down 20% from 2022 and almost 60% from 2021. The declining volume can be attributed to the evaporating refinance market and the struggling home purchase market which continues to be squeezed by higher rates, persistent low housing inventory, and rising costs.

Lenders nationwide must make critical operational decisions as volume continues to decline. Only lenders who are hyper-focused on operational efficiency and effective pipeline management will survive. Lenders can’t afford not to close the loans that come through their doors and having the right management strategy in place could be the difference between success or failure as an organization.

The most successful businesses measure, track, trend, and compare their key KPIs against their budget.  In the mortgage industry, you’d be hard-pressed to find a more important measure of efficiency than pull through. There are many types of pull through, in every phase of the life-of-loan cycle, and all of them impact a mortgage company’s efficiency and ultimately financial performance.  At a high level, the main drivers of operational efficiency start here:

For all originators:

1. Initial application to complete application (Loan Officer)
2. Complete application to loan approval (Processor)
3. Underwriting decision to funding (Underwriter)

For mortgage bankers:

4. Loans funded to loans sold
5. Loans locked internally to loans funded
6. Loans locked with an investor to loans sold to that investor

For correspondent investors/aggregators:

7. Non-Delegated – Underwriting decision to purchased
8. Delegated and Non-Delegated – Loans locked to purchased

The thresholds for success will be different for every business – you will need to understand the relationship between headcount and pull-through based on your unique business model. Nail those metrics, and you’re in good shape – you’re running lean and mean. Conversely, if your policies and procedures are set up in such a way that allows incomplete or poorly screened and processed applications to be submitted to processing and underwriting, those metrics are doomed, and your team will be working on too many files that never close. This translates into needing too many employees to get loans closed, and in a market where margin compression and increasing origination costs are creating havoc for bottom lines, doing more with less is the only way to survive.

For items 1, 2, and 3 above, measuring pull-through by the employee is a must for retail and consumer direct originators. Compare these numbers for your loan officers, processors, and underwriters – measure by unit count (versus loan amount) to get at true operational efficiency. If you are a third-party originator (wholesale or correspondent), then measure by client and account executive.

For purposes of this discussion, we’ll focus on pull through metrics related to Rate Locks (items 5, 6, and 8) – using the term “Rate Lock Pull Through” (RLPT). The focus will be on mortgage companies who sell or broker loans on a best-efforts basis. We’ll share the different strategies along with their pros and cons, the different ways to measure RLPT, and ultimately how your results will impact your employees and business partners.

What’s Your Strategy?

The first question you need to ask is, “Who controls the final destination of the closed loan – the loan officer or a lock desk?” Answering this question is often difficult, as you must consider many variables when determining which path is correct. Before we dig into those variables, let’s look under the hood of each strategy.

Strategy #1 – Loan Officer locks directly with the investor

In this scenario, the company would either create a basic rate sheet or give loan officers access to approved investor pricing, and the loan officer would lock the loan directly with the investor. They would determine the length of the lock term (30, 45, 60 days) and at what rate/price.

• Pros

  • Loan officers love to have the ability to control the destination of their loans, and it garners them with more flexibility. They have access to all approved investors, products, and pricing and can choose the option that best suits the need of their borrowers.
  • The loan officer can select a preferred investor with whom they have a strong relationship or can choose an investor that the borrower feels more comfortable working with.

• Cons

  • The lender has no control over the destination of the loan and may be subject to increased risk, especially if they allow loan officers to lock loans too early in the loan life cycle (such as before a complete application is taken) or before a particular milestone has been achieved (leading to higher fallout).
  • The loan officer may need full access to, or understanding of, specific investor overlays or guidelines, or they may lock a loan with an investor for which the borrower will not qualify.

Unless there is a high degree of trust and supervision, along with a clear set of policies and expectations for pull-through, this strategy often results in lower RLPT than Strategy #2.

Strategy #2 – Centralized Lock Desk

In this scenario, a loan officer would have access to best execution pricing, most likely through a pricing engine. Based on the loan level criteria, the loan officer would submit the lock request to the centralized lock desk through the pricing engine, and the lock desk analyst would determine the best terms and investor to lock that loan with.

• Pros

  • The lender has complete visibility and decision-making power to determine the best course of action for that lock and can make a real-time decision on which investor the loan should be locked with.
  • For companies that also sell loans on a mandatory basis, the lender can decide whether the loan needs to be locked directly with an investor immediately (best efforts) or hedge the loan and lock it later (mandatory). This allows the lender to achieve maximum profitability.

• Cons

  • If there is not enough lock desk coverage to handle rate lock requests as they come in, the loans may not get locked promptly, and the market could deteriorate during that unlocked time. The loan officer would have already offered a rate to a borrower, and the lender may have to honor that rate at a lower price.
  • Loan officers lose the ability to request a specific investor up-front. They would have to rely on the company’s relationship with the investor if assistance or exceptions are needed.

Both lock strategies are viable options for lenders, providing they know which one is a better fit for their business model. Data from AmeriHome-approved lenders does show that those who establish a centralized lock desk, on average, tend to have better RLPT. Lenders who allow loan officers to lock loans are most successful at achieving high RLPT when they employ highly efficient and experienced loan officers in conjunction with policies and/or other tactics that promote the right behaviors.

Measuring Rate Lock Pull Through

While there are different ways to measure pull through, what matters most is that it is measured consistently month over month.

• Lock Month Pull Through – this measures the performance of rate locks taken in a given month – the downside being that longer-term locks will delay the ultimate calculations
  • For example, February lock month RLPT would use all February rate locks as the denominator, with the numerator being all the February rate locks that funded
  • You’ll need to wait up to 90 days in most cases to get an accurate reading
  • With enough historical data, this becomes a meaningful method
  • One advantage of this method is that you will be able to observe the behavior of loans that are locked in a similar rate environment
• Leave Month Pull Through – this measures the performance of locks that “leave” the pipeline in a particular month
  • In this example, the denominator would be all the Rate Locks that left the pipeline in a month – either through funding, lock cancelation, or expiration; the denominator would be all the loans that funded that month (without regard to which month they were locked)
  • This is a more real-time measure, though it is subject to timing challenges and is more suited to a scaled business versus a smaller business that has more variability month-over-month
  • May be best to look at rolling 90-day blocks to blur peaks and valleys in the results

Regardless of which methodology is used, it is critical to compare your actual results to expected or budgeted results. Talk to your investors to see what their expectations are – they hedge the loans you lock with them based on the expected RLPT for product type, loan purpose, origination channel, lock term, and most importantly your historical performance with them. If an investor’s average RLPT for all clients is 80% and yours is 70% with them, there’s a chance you are not getting their best price.

Amerihome is a trusted organization that has experience helping clients not only achieve optimum profitability but also maximize their pull through lock strategy. Contact us today to learn more about how we can help you.

 

Thanks for your time,

Steve
EVP, National Correspondent Sales

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