A Peek Inside Successful Lending Shops

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Feature Minimize Risk in a Rising Interest Rate Environment Effective tools help remove contingent liability in a volatile marketplace. By Dean Brown, CEO of Mortgage Capital Management W e knew it would happen at some point. It was inevitable. Interest rates are on the rise and so is market volatility. With increasing rates and market volatility, mortgage bankers are looking for valuable ways to stabilize and increase growth without increasing risk. There are several effective alternatives to add business, decrease risk, and manage pipelines in a rising/volatile interest rate environment including builder commitments, long-term and float-down locks, and incorporating options in the risk management toolbox, among others. Forward Builder Commitments F orward commitments are a form of insurance for builders, lenders, and buyers. They are put options, or contracts to sell assets at an agreed price on or before a particular date, that act as a guarantee from a lender that for a specific period of time, anywhere from 180 days or longer, a block of financing will be available at a guaranteed rate to any of the builder's customers who qualify, no matter how high rates go. 24 | The M Report Forward commitments are a smart way for builders to protect their products' salability in future markets. Builders want to avoid situations where they begin construction under an agreement with a buyer, only to find out the buyer doesn't qualify for financing due to rising interest rates. In these types of cases, the builder is left with excess inventory that needs to move quickly. If the builder entered into a forward commitment with a lender, he can be confident that affordable financing will continue to be available to another buyer with a guarantee that the interest rate will not exceed the agreed-upon amount, if the buyer qualifies for financing. The advantage of forward commitments for lenders is the opportunity to increase their pipelines through an increase in loan applications driven by the builder. By entering into a forward commitment, the lender becomes a preferred vendor of the builder. Even if the agreement does not include an on-site lending representative, the builder representatives will suggest that potential buyers work with the preferred lender to ensure a favorable interest rate at closing. Buyers are motivated to work with the preferred lender because they do not have the guarantee of a capped interest rate with other lenders. Although not all loans will be eligible for financing through the forward commitment, the lender still has the opportunity to offer competitive financing to the buyer, thanks to the preferred vendor status resulting from the forward commitment. Additionally, the number of loans originated through the builder relationship will be greater than the number of loans protected under a commitment. Long-Term and Float-Down Locks L ong-term locks help define the worst-case scenario for the borrower. They can be used effectively to allow borrowers to lock their loan for a specified time frame, usually up to 180 days, at a price that reflects the current forward market. If rates improve or stay unchanged relative to where they are when the loan locks, or if the market gets worse, the borrower always knows what their rate will be. The cost for a long-term lock typically requires a refundable upfront fee toward closing costs if the loan funds. In the event the borrower cancels the transaction, the fee is usually retained by the mortgage banker to guard against fallout and roll costs during the lock period. With many lenders, a borrower waiting for a builder to finish a home can apply for a mortgage and purchase interest rate protection. The borrower pays one point up front, at the time of locking, for the protection. By collecting the

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