How Lenders Can Shorten Their Loan Holding Period

With banks accounting for a steadily declining percentage of home mortgages, non-bank lenders and the brokers who service them play vital roles in the real estate market. Brokers are in an especially sensitive position because they effectively have two clients — the borrower and the lender — and it’s the task of brokers to balance the needs of both.

The borrower wants to secure a loan on favorable terms while lenders are looking to make a return on their investment.

Holding Period Return and Securitization

Lenders who aren’t interested in holding the mortgages as a conservative, long-term play can sell them further upstream by bundling them into a mortgage-backed security, which enables them to shorten their holding period to one that aligns with their immediate investment goals.

That might mean a relatively small return on the initial investment, but once annualized — converting the holding period return into the actual yield on investment — the numbers can be very favorable. It’s especially so in the case of mortgages with shorter terms, perhaps 15 years instead of the more common 30. Those loans generate higher cash flows, which are appealing in shorter time frames.

If you’re a broker whose lenders expect to make their returns from securitization, your role is to help provide them with solid, appealing mortgages that will be easy to sell in the upstream market. As it happens, that coincides with your borrowers’ best interests as well.

Making the Case to Clients

Most consumers understand that a shorter mortgage can reduce the amount of interest they’ll pay over the lifetime of the loan, by tens or even hundreds of thousands. The difficulty is that a shorter term substantially increases their monthly mortgage payments as well. That can be a stress point for your borrowers, even if their income should be quite adequate to cover the payments. They may also feel a degree of post-2008 wariness about your motives for suggesting a shorter term.

There is a legitimate degree of risk when steering clients in this direction. If they lack financial savvy, they’ll struggle to make ends meet in the years after closing their mortgage. That may lead them to refinance, which is bad for your investors. The unfortunate reality is that they’ll think of themselves as “house poor,” even if they’ve simply mishandled a perfectly adequate income. They’re likely to blame you — not their own spending habits — which can cost you future business and referrals.

A Power Tool for Brokers

In an ideal scenario, you would be able to connect potential borrowers to a money-skills coach for a few weeks before sourcing them a mortgage. A financial adviser’s skilled eye can quickly identify areas of waste and inefficiency in the household budget, usually beginning with the lack of any formal budget at all. Similarly, most consumers’ credit scores leave points on the table, simply because they don’t understand how the credit system works.

This kind of coaching would have an immediate impact. Most people can increase their credit scores meaningfully in a relatively short time, which improves both the rates they can expect and the range of lenders who’ll consider them. The consumer benefits as well, partly because an improved rate makes the monthly payment more manageable and partly because they’ll gain the skills to manage their money more effectively.

In real life, the cost of such hands-on, individualized coaching would be prohibitive for most of your clients if it came from an individual adviser. But what if ScoreMaster could do the same things?

Enter ScoreMaster

That’s precisely the high-impact service you can offer your clients with ScoreMaster. It works by enabling you and your client to become collaborative partners in building their financial future.

Your clients start by giving ScoreMaster the information it needs to build a picture of their finances, including debts, assets, income and payments. Then it suggests a plan to tweak those elements to maximize their credit score and debt-to-income ratio, making them more appealing to lenders. It is, essentially, the financial equivalent of the Instagram image filters they’re already familiar with.

In a matter of just a few minutes, you’ll be able to show your clients the difference between the loans they qualify for at that moment versus the loans they could get with a higher credit score. ScoreMaster’s real-world experience shows that users averaged a 61-point increase in their credit score in just 20 days*, which is practically real-time in real estate terms.

That 61-point spread should make for an eye-opening difference in the loans available and encourage your clients to commit to the plan. When they do, they’re also making a commitment to you. 

After-Sale Benefits

It’s important to note that ScoreMaster is not just a tool for securing mortgages but a long-term partner in financial management for your clients. It uses a system of prompts and rewards — gamification in developer terms — to encourage them to continue with good financial habits. If you’ve ever dutifully paced the halls of your office to “get in your steps” at the prompting of a fitness band or smartwatch, then you’re already familiar with how it works.

Clients who continue to use ScoreMaster to help manage their affairs consistently maintain higher credit scores and lower levels of revolving credit. This in turn sharply reduces the likelihood that your clients will struggle to manage their mortgage payments in the future and helps keep floor rates in place.

*Legal Disclaimer – ScoreMaster is a patent-pending educational feature simulating credit utilization’s effect on credit scores via payments or spending. Your results may vary and are not guaranteed.

References:

1. https://www.fdic.gov/bank/analytical/quarterly/2019-vol13-4/fdic-v13n4-3q2019-article3.pdf
2. https://www.investopedia.com/terms/h/holdingperiodreturn-yield.asp

Categorised in: Lending Tips

This post was written by David B. Coulter