A Peek Inside Successful Lending Shops

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Feature Effectively utilizing the proper tools will not only increase lender pipelines, but also minimize the risk from fallout volatility. point up front and possibly paying it back only if the borrower closes, the lender protects itself against the possibility the customer will go to another lender for funds during the lock period. A float-down lock structure is like a one-off builder commitment sold directly to a buyer. The mortgage banker agrees to fund a loan at a maximum rate and price over a longer period, usually 180 days (the construction period). A float-down lock provides the same upside protection to the borrower as a rate lock, along with an option to reduce the rate if market rates decrease. The float-down lock option can be applied to any type of mortgage, but a borrower pays more for it since it is more valuable to the borrower than a rate lock and costs more for the lender to provide. Applying a float-down lock, the lender promises that the agreed-upon loan terms will be honored at closing, regardless of where market rates move to that point. Float-downs give borrowers the one-time right to have their rate reduced, at which point the float-down converts to a lock. The pricing is registered and hedged as an optional exposure sold to the buyer, and the borrower has the right during the period to lock at the current pricing available or the maximum set at the float-down registration, whichever is lower. Float-downs impose an additional cost to the lender because it committed to the terms agreed upon if interest rates go up before closing. If rates decrease before closing, the borrower has the right to lock at the lower rate. This option cost can be offset through pricing, the upfront fee, or a combination of both. The float-down lock structure and pricing can be customized to suit the specific needs of a buyer or market. For example, the upfront fee could be set low or equal to zero with higher caps and/or spread added on top of the current market pricing to pay for the option cost to hedge the loan. Alternatively, the upfront fee could be set at the market cost for the options, which would lower the cap level for the borrower. ARMs: More Bang for the Buck H istorically, adjustable-rate mortgages, or ARM loans, have been used to combat a rising interest-rate environment. An ARM loan is a mortgage with an interest rate that may change, usually in response to changes in the Treasury bill, London Interbank Offered Rate (LIBOR), or prime rate. The mortgage holder is protected by a maximum interest rate, which can adjust in three, five, seven, or 10 years, depending on the terms of the loan. ARMs usually start with better rates than fixed mortgages in order to compensate the borrower for the additional risk that future interest-rate fluctuations will create. Until recently, it didn't make sense for most borrowers to look seriously at ARMs. With fixed-rate mortgages available at interest rates near or below those The M Report | 25

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