SOMB 2 - Art & Science of Pricing
Rate Lock Types - ANS-1) Float
2) Lock
3) Lock with 'float down' option (common) -
4) Long term/extended rate lock with or without float down option
5) Extended Lock Rate -
Float - ANS-When borrower wishes to let the rate/price "float" or adjust men the market
is float or rates are declining before closing. When closing, the lender locks the rate and
terms on the loan in order to accurately disclose to the borrower and prepare the closing
documents.
Lock - ANS-Locking in a rate/price, usually for 15-60 days, providing the borrower
protection and peace of mind in an upwardly moving rate environment. The lock
agreement is executed by the borrower and lender.
Lock w/ Float Down Option - ANS-Option for when the borrower wants to be protected
from higher rates, but also wants the ability to take advantage if rates were to move
down.
Lender agrees to lock in at a rate to it can never go higher that the rate/price available
at the time of the lock, and the borrow can "float down" if rates go lower.
Extended Rate Lock - ANS-When a lender allows a borrower to lock a rate for 90 days
or more (a period beyond the typical 15, 30 or 60 day periods).
Typically used by a borrower when they have a house to sell, or they are buying new
construction that is not yet complete.
A builder will occasionally provide this option when they want to attract potential
customers to a development that is under construction.
The extended rate lock may or may not include the float-down option.
Conforming Products - ANS-1) Conventional Fannie Mae/Freddie Mac
2) FHA/VA
3) Rural Housing (RHDA)
, 4) FHA reverse mortgages
5) Affordable Housing Initiatives (FNMA/FHLMC)
Non-conforming Products - ANS-1) Jumbo
2) Non-QM (Alt-A, Sub-prime, etc.)
3) HELOCs, second mortgages
4) Other (ex: FHLB programs)
Two different assets created when loan is closed - ANS-1) The loan itself - Investors
receive principal and interest payments net of fees
2) Servicing - the right to service the loan in exchange for a servicing fee
** Both assets have unique values and are key components of a rate sheet
Scenarios for lenders holding assets - ANS-1) Keep both
2) Sell both
3) Sell one and keep the other
**strategy comes into play when making this decision
Servicing Fees - ANS-1) SRP - Servicing Released Premium: Company pays for the
right to service a loan. usually used by wholesale correspondent lenders.
2) MSR - Mortgage Servicing Right: Accounting industry description of the servicing
asset.
3) MSA - Mortgage Servicing Asset: This is the term that may be used by financial
institutions like banks and credit unions.
Determining Servicing Values - ANS-Step 1 - Calculate Anticipated Net Cash Flow (over
the life of the loan)
Step 2 - Determine Servicing Value
What effect does interest rates have on a servicing portfolio? / What is the enemy of a
servicing portfolio? - ANS-Low interest rates because typically loans will get paid off
faster, creating prepayment speed risk, AND people are more likely to refinance a loan,
ending the life of the MSR.
Impact of Prepayment Speeds - ANS-Prepayment speeds decrease the total cash flow
on the balance sheet
Servicing Value vs MSR - ANS-Servicing Value = Present value of net servicing cash
flow received over an anticipated period of time.
Rate Lock Types - ANS-1) Float
2) Lock
3) Lock with 'float down' option (common) -
4) Long term/extended rate lock with or without float down option
5) Extended Lock Rate -
Float - ANS-When borrower wishes to let the rate/price "float" or adjust men the market
is float or rates are declining before closing. When closing, the lender locks the rate and
terms on the loan in order to accurately disclose to the borrower and prepare the closing
documents.
Lock - ANS-Locking in a rate/price, usually for 15-60 days, providing the borrower
protection and peace of mind in an upwardly moving rate environment. The lock
agreement is executed by the borrower and lender.
Lock w/ Float Down Option - ANS-Option for when the borrower wants to be protected
from higher rates, but also wants the ability to take advantage if rates were to move
down.
Lender agrees to lock in at a rate to it can never go higher that the rate/price available
at the time of the lock, and the borrow can "float down" if rates go lower.
Extended Rate Lock - ANS-When a lender allows a borrower to lock a rate for 90 days
or more (a period beyond the typical 15, 30 or 60 day periods).
Typically used by a borrower when they have a house to sell, or they are buying new
construction that is not yet complete.
A builder will occasionally provide this option when they want to attract potential
customers to a development that is under construction.
The extended rate lock may or may not include the float-down option.
Conforming Products - ANS-1) Conventional Fannie Mae/Freddie Mac
2) FHA/VA
3) Rural Housing (RHDA)
, 4) FHA reverse mortgages
5) Affordable Housing Initiatives (FNMA/FHLMC)
Non-conforming Products - ANS-1) Jumbo
2) Non-QM (Alt-A, Sub-prime, etc.)
3) HELOCs, second mortgages
4) Other (ex: FHLB programs)
Two different assets created when loan is closed - ANS-1) The loan itself - Investors
receive principal and interest payments net of fees
2) Servicing - the right to service the loan in exchange for a servicing fee
** Both assets have unique values and are key components of a rate sheet
Scenarios for lenders holding assets - ANS-1) Keep both
2) Sell both
3) Sell one and keep the other
**strategy comes into play when making this decision
Servicing Fees - ANS-1) SRP - Servicing Released Premium: Company pays for the
right to service a loan. usually used by wholesale correspondent lenders.
2) MSR - Mortgage Servicing Right: Accounting industry description of the servicing
asset.
3) MSA - Mortgage Servicing Asset: This is the term that may be used by financial
institutions like banks and credit unions.
Determining Servicing Values - ANS-Step 1 - Calculate Anticipated Net Cash Flow (over
the life of the loan)
Step 2 - Determine Servicing Value
What effect does interest rates have on a servicing portfolio? / What is the enemy of a
servicing portfolio? - ANS-Low interest rates because typically loans will get paid off
faster, creating prepayment speed risk, AND people are more likely to refinance a loan,
ending the life of the MSR.
Impact of Prepayment Speeds - ANS-Prepayment speeds decrease the total cash flow
on the balance sheet
Servicing Value vs MSR - ANS-Servicing Value = Present value of net servicing cash
flow received over an anticipated period of time.
