Whole Loan Pricing involves a two-step process:

1. Twice monthly, we update core loan pricing, based on an interface we have with Zillow, and download pricing on 1,950 loans that essentially cover the universe of conventional and government loan types (e.g. by term, coupon, product).  These prices are saved within the L1A software to allow us to price our customers’ whole loans.  The resultant prices change continuously based on market dynamics (e.g. supply, demand, market rates, perceptions, etc.) but are only captured twice per month.
2. Zillow prices are based on averaging actual mortgage companies’ “rate sheets.”’  Mortgage prices are communicated between buyers and sellers using these “rate sheets.”  The biggest and most volatile components are the core market prices, as described above.  These change daily.  Additionally, however, rate sheets always include “stips” (stipulations or price-adjustors).  These price adjustors include factors for state, credit (FICO/LTV), occupancy, loan purpose (Refi versus PMM), loan size, and property type.  Accordingly, our system also includes provision for these stips; these change, but not frequently.  and  so, we update them, and reflect them in the loan assumption tables, once a quarter.

Having completed the third-quarter review, it feels timely to share that changes are not dramatic from last quarter, but a few are noteworthy:

• Principal Balance - Our core (#1) pricing is based on a hypothetical $300,000 loan; we then calculate price adjusters for balances up to the conforming loan limit (+/- 700,000) and down to 50,000.  Interestingly, low loan balance loans are priced higher than the higher balance loans (see graph below).  Low loan balance loans (LLB) are reputed to have much more stable prepay behaviors than their higher balance cohorts.
• Property Type – The market does not seem to care if the property is a townhouse, condo, two-family or single family; they are all priced the same.  They do draw the line however on Co-ops (-12bps) and manufactured housing (-108bps). I assume the co-ops issue is the lack of depth to this market (primarily a NY phenomenon).  Manufactured housing must be credit related or carry natural disaster risk potential.
• FICO/LTV – The market does not differentiate to a great extent changes in FICO/LTVs in “government” loan pricing.  This is due to the guaranteed/insured nature of most government products.  Conventional loans up to 85% LTV, however, are fairly sensitive to changes in these credit metrics.  Over 85% LTV, though, become less sensitive as MI (private mortgage insurance) kicks in.
• State - California loans are priced the worst in the country.  Conventionals are, on average, 21 basis points lower than “average”, while Governments are 24bps lower.  Texas is the highest.

For more data & analysis, visit us at level1analytics.com.

About Dr. Tom, CMB

Dr. Thomas J. Healy, CMB, Co-Founder & Chief Innovation Officer at Level1Analytics® Powered by Intraprise, has over 30 years of unmatched experience in financial valuation and value modeling. Prior to creating Level1Analytics, Dr. Healy held several executive-level positions at top lending institutions, notably working for David Rockefeller at Chase Manhattan Bank early in his career. Dr. Healy's experience extends beyond the US market; he has worked on assignments in Hong Kong, Bangalore, and Moscow.

Dr. Healy obtained his Bachelor of Science degree in Mathematics and Economics; Master’s degree in Business Administration, specializing in Banking; and a Doctorate degree in Business Administration with an emphasis on the business application of information technology. He holds the Certified Mortgage Banker designation. Receiving his doctorate at age 50, Dr. Healy passionately believes that continued, lifelong education is a powerful tool for success.

A Master Faculty Fellow and Dean of the Faculty of the Mortgage Bankers Association, Dr. Healy is a frequent lecturer and author on asset optimization topics to the financial services industry. His text on mortgage servicing rights, Servicing Portfolio Evaluation and Management: A Financial Perspective, published by the Mortgage Bankers Association, is in its second edition (2007).