Optimized pricing is the secret to a consistently profitable pipeline

Every pricing action has a reaction. As a mortgage pricing manager, every move you make has some expected outcome. But of course, how the market reacts to your decision to increase margin can negate your move. When you make your moves in an effort to change your competitive position, how will you know whether your actions have been effective?

One way to think about this is to model pricing decisions in the context of the entire market’s pricing moves. Within our model, we use two measurements to situate your position with respect to your competitors.

The first of these is Price Execution Position (PEP), an indicator of how aggressive your pricing move is relative to other players. In other words, how strong are you out there in the market. For example, perhaps you set a high margin on your jumbo mortgages and decide to focus your competitive moves on lower-value mortgages to go after volume.

Alongside the PEP is the Presence Online Position (POP) — how visible and present are you in the market? How much is your price popping out in front of the customer? If you score highly on both PEP and POP, you’re in a great position for ROE, although likely at the expense of volume.

Taking this a step further, we can zero in on other factors to compare the score for any mortgage product under different FICO, LTV and geographic conditions to provide an accurate, real-time assessment of its competitive position.

The trick, of course, is to be continually optimizing your price in response the daily dynamics of the market so that you maintain your position against the norm consistently over time. This is the essence of an effective pricing strategy.

But why this ruthless dedication to micro-pricing? One good reason is to minimize turbulence in your pipeline, because turbulence represents hard costs.

It’s all about execution

If you’re all over the place with your pricing, you’ll see wide variation in your lead volume. If you can minimize these “bubbles” in your pipeline, you’ll have smoother capacity and more predictable forecasts.

Let’s imagine that the average lead spends about two months in your pipeline, and every day you aim to add 100 loans into it. As every great sales manager knows, you want your lead volume to be consistent. You don’t want five leads one day and 200 the next.

It’s not just about having good deal flow – there are some hard costs associated with these fluctuations because you must allocate back-end resources to each lead in order to convert it to a loan.

As that lead winds its way through processing, it hits the desks of the loan officer, underwriting, back to the loan officer for more docs, back to underwriting and then maybe over to legal. We’re looking at somewhere between $2,500 and $4,000 to process this lead, and if we have to ramp up processing resources to deal with spikes in the pipeline, our costs will only increase.

Smart pricing that attracts the “right” opportunities is the key to profitability. In order to optimize your pricing, you’ll need to embrace a digital approach. That means legacy pricing models and printed rate sheets are a thing of the past. Instead, highly dynamic and well-informed pricing, driven by real-time data, is the only way to stay at the top of the pile.

 

Joe Zeibert is managing director, global mortgage solutions at Nomis Solutions.

 

In the webinar “Your Blueprint for Price Optimization,” Joe Zeibert from Nomis Solutions shares insights on implementing market-optimized pricing. He also uses current market data to illustrate how to identify opportunities that align with your business strategy and product mix, when to optimize your portfolios and when to back away. Register now for access.