What does a mortgage lender do when the entire industry gets turned on its head? In the aftermath of the subprime implosion, a lack of volume has forced lenders into a defensive shell, requiring them to tighten their belts and brace for a potentially cold and long winter.

But history has shown that under periods of rapid and massive change, technology innovation can turn market vulnerability into market opportunity. For mortgage lenders, product and pricing engines might be that innovation that enables them to follow a lean lending strategy while, at the same time, laying a foundation for growth - both now and in the future.

The credit crunch has severely restricted the flow of loans as investors have tightened up underwriting guidelines and done away with entire product lines. Projections for 2008 show an estimated 18% to 20% drop in origination volume - the lowest level in almost eight years.

Of the loans that will be originated in 2008, the vast majority will be conforming and government loans - products that yield much thinner margins than the Alt-A and nonprime products of the past. As a result, lenders face significant downward pressure on revenue and profitability.

So what is the best way to reverse this situation? There are three areas where product and pricing technology can enhance a lender’s business strategy, with an emphasis on growth and efficiency. Although there are a myriad of technology solutions available, product and pricing automation has the most direct impact where it counts - at the point of sale.

Pump Up the Volume
Originators need a reason to choose one lender over another. It might be based on a pricing incentive, a reputation for service, or simple brand recognition, but lenders must present a tangible value proposition in order to attract volume from originators.

When you consider the plight of originators, it’s easy to identify their challenges. Tighter underwriting standards have made loans much more difficult to obtain, while frequent changes to guidelines and product availability leave them unable to determine borrower eligibility. In today’s environment, originators are more concerned with closing deals rather than holding out for better pricing. After all, originators (and lenders) only make money on loans that fund.

This is where product and pricing engines can help lenders attract more volume. By automating loan eligibility and pricing at the point of sale, originators get exactly what they’re looking for: definitive answers in the shortest time possible.

Whether they receive an approval or denial, originators appreciate the fact that a product and pricing engine gives them an accurate response up front, without stringing them along with false prequals that waste their time. As a lender’s reputation for reliable products and pricing increases, so do repeat business and referrals.

Volume Management
Attracting originators is the first step towards growth, but lenders are then faced with the problem of managing the increased volume. Do you hire more employees to handle the throughput, or do you try to squeeze more productivity out of your existing staff?

Studies have shown that on a per loan basis, personnel costs represent more than 40% of a lender’s overall expense. Making the decision to hire additional staff commits the lender to an increase in fixed costs, which, given the volatility of today’s market, is particularly risky. Can enough volume be sustained to justify the investment?

On the other hand, making do with existing staff can result in higher productivity, but if volume becomes unmanageable, then lenders risk overworking employees and lowering their service quality.

Product and pricing engines can provide a solution that is essentially the best of both worlds. Because of its ability to accurately assess eligibility, product and pricing engines can effectively screen for those loans that have the highest probability of closing.

This means that production pipelines are concentrated with revenueladen opportunities, and less staff resources are spent on rooting out ineligible loans. Lenders can boost production capacity because the product and pricing engine is shouldering a larger portion of the work, allowing them to hold off on hiring new employees, without burdening existing staff.

The consequence of accurately identifying eligible loans is a higher rate of pull-through, as more loans that reach the production pipeline get delivered to investors. This is obviously a benefit to lenders, because it’s a clear indicator that they are making the best use of their resources.

But don’t forget that the benefits of high pull-through also translate to investors. If lenders are able to deliver on the majority of their locks, then investors are wasting less resources on fall-out deals themselves. Demonstrating high pull-through can result in stronger relationships with investors to the extent that a higher pricing tier is given to lenders, allowing them to be more price-competitive and drive volume even higher.

In fact, pull-through is a sensitive issue for investors nowadays. We’ve seen evidence of lenders losing their seller status because of low pullthrough rates, and it is not unusual to see a simultaneous rise in minimum pull-through rate requirements from investors. Given this reality, the value of a product and pricing engine becomes even greater.

Accuracy Is Key
The argument for a product and pricing engine is evident throughout a lender’s business strategy. Higher volume, efficiency and pull-through are all reachable goals that can be achieved through this single technological tool.

But what many lenders don’t realize is that there is one key element of a product and pricing engine that will determine whether this sequence of events will occur at all: accuracy. A product and pricing engine must be able to generate results that accurately reflect the eligibility and pricing decisions made at the investor level. Without accuracy, the entire value proposition is lost.

The accuracy of the decision will have an obvious and immediate impact on an originator’s usage of an engine. If you remember our initial analysis, originators are looking for the lender that will give them a definitive answer in a short amount of time.

If the product and pricing engine is only capable of returning an approximate - or even worse - a
completely inaccurate result, then the originators don’t gain any reliability or speed benefit. They’re forced into a traditional manual inquiry process, which runs counter to the goal of product and pricing automation.

It also follows that without accurate determinations, a higher percentage of ineligible loans will enter the production pipeline. This lowers staff productivity as more resources are spent processing loans that are ultimately denied.

And finally, a lack of accuracy will deliver a lower rate of pull-through to investors. Any potential pricing advantages disappear, and lenders will be under the gun to improve pullthrough results or risk losing their correspondent relationship.

Choosing a Vendor
By identifying accuracy as the primary focus for product and pricing engine performance, lenders now have a quantifiable benchmark to evaluate various vendor offerings. It’s a good thing, because a simple Google search will turn up at least a half-dozen product and pricing technology vendors - each touting a laundry list of features and functionality.

The first thing lenders need to look for when evaluating product and pricing engines is the ability to read live credit reports. This is a must-have feature, because credit reports contain a treasure trove of data that is essential for producing accurate eligibility and pricing decisions. A live credit file sourced directly from a credit vendor also establishes a level of security and reliability that simply cannot be compared to an originator’s estimation.

Other important variables include the overall financial stability of the potential vendor partner, as well as issues like staff training, relationship with originators and track record of experience and service. This is a longterm relationship. Choose a partner that you know you can count on over the long-haul.

Once credit capability and financial stability have been established, the only concern for lenders is to test the engine and rate its performance for accuracy. This can be done by running a set of credit and loan scenarios through the system that they’re evaluating and comparing the results with actual investor findings. It should become obvious which engine produces the most accurate results.

In today’s lean environment, lenders need to do what all businesses are doing: eliminate everything that does not make money and focus on the things that do. Product and pricing engines are an elegant solution for lenders, because they target the key problems of low volume and weak profitability.

By giving originators the instantaneous and accurate answers they crave, product and pricing engines create an environment for lenders that stimulates growth, boosts productivity and enhances investor relationships.

It’s important to remember that a product and pricing engine needs to be more than just window dressing on a lender’s Web site. Recognize the importance of accuracy, and you’ll discover that a product and pricing engine is a powerful origination tool that allows your business to compete more effectively in today’s leaner, meaner environment.