August 11, 2015

Competition in the Secondary Mortgage Market: Is Price Competition Possible?

Price competition will drive banks to come up with more personalized services to attract consumers.

There appears to be some level of debate around how much price competition is warranted in the secondary mortgage market.

With alternative online lenders popping up everywhere on the internet, the competition for mortgage lending is fiercer than ever, forcing traditional big banks and other conventional financial institutions to step up to the plate and get a little creative to remain competitive and relevant in the lending market.

What Exactly is a Secondary Mortgage Market?

When consumers finance their homes with a mortgage, they are participating in the primary mortgage market with their lender. In the secondary mortgage market, the lender recoups the funds lent to the borrowers through third party investors who essentially influence interest rates more than the original lender.

These loan funds are pooled with other mortgages that have the same interest rates and terms. While larger lenders have their own pool of loans that meet the criteria, other smaller lenders can join in a pool on their own among each other. These loan groups are then put together as a mortgage backed security (MBS) and sold to an interested outside investor who will then determine a set of guidelines that dictate how loans are bought and underwritten.

When mortgages are bought by private investors in the secondary market, the rates and fees are heavily influenced by competition and risk levels. Loans that are seen as more risky need higher interest rates to be charged in order to protect and attract investors.

The loan market has become incredibly competitive, with the clear winner being the consumer.

The inevitable interest rate attached to mortgages will fall somewhere between what a borrower can afford to pay and what investors are willing to accept as an adequate ROI.

Should Prices for Mortgages Be More Competitive?

Many financial experts believe that more competition is needed in the secondary lending market that go beyond government-backed bodies to bring more private capital into the industry. In general, MBS guarantors should be able to compete amongst each other in the quest for more profitability in the loan industry.

But many question if price competition will have any value in the secondary mortgage market. Many market watchers wonder how easy price competition would be, considering the fact that private investors and guarantors would have to adhere to stringent mortgage limitations and capital standards.

However, many lenders and banks have managed to become highly successful thanks to savvy business models, despite the same level of criteria that they have to follow.

In addition to price, good service cannot be underestimated, despite how important the role of price plays in this scenario. Successful banks are those with a deep understanding of the lenders that operate in both the primary and secondary markets. Such knowledge and understanding has allowed them to offer highly personalized services, as well as product and service packages that fit customers in all realms.

Even if the price point isn't the greatest, banks and lenders can still win loyalty among their clients with impeccable service.

However, competition can make for better service. Even the notion of more competitive prices being offered by others could help boost the level of service. This can help all participants keep sharp in respects to their pricing strategies.

Garnet Capital - Keeping Banks and Financial Institutions Competitive in the Lending Market

While banks have traditionally been the primary source of loans to consumers in the US, a host of alternative online lenders have been paving the way through the secondary loan market.

In an effort to remain on the competitive forefront, banks need to devise a strategy to remain competitive while dabbling only in loan portfolios that prove to be profitable.

At Garnet Capital, we are in the business of helping banks and lenders sell loan portfolios that are profiting little, and acquire those that can boost their bottom line while still maintaining a competitive edge in the market.

To learn more about how Garnet Capital can help financial institutions keep their footing in an increasingly competitive environment, contact us today at GarnetCapital.com.