Loan Pricing
Using An Investment “Bogey” Approach For Pricing Portfolio Loans
By Tom Parliment
July-August 1994
In this article, Tom Parliment lays out the concept of using benchmark securities as bogeys in determining whether portfolio loans are well or poorly priced.
- Establishing duration of investment alternatives.
- Adding risk spreads to securities.
- Adding servicing costs.
- Adding adjustments for credit risks.
Making Effective Loan Pricing Decisions - Part 1
Tom Farin
January-March 2001
In this first article in a multi-part series, Tom Farin talks generally about how the loan pricing process must be upgraded. He then introduces the concept of using benchmark securities in pricing evaluating whether portfolio loans are well or poorly priced. Examples are taken from the MissFed case.
- Upgrading the pricing process.
- Changing our thought process.
- Taking advantage of technology.
- Developing the wholesale bogey.
- Mississippi Fed Case - Evaluating the 5/1 ARM.
- Breaking out interest rate risk.
- Breaking out option risk.
- Calculating the wholesale equivalent rate.
- Adjusting for credit risk.
- Adjusting for servicing cost.
- Using the retail equivalent rate to identify well priced loans.
Making Effective Loan Pricing Decisions - Part 2
By Tom Farin
January-March 2001
In this second article in a multi-part series, Tom begins with a discussion of how technology can improve pricing decisions. He then introduces a well-priced loan then introduces a marginal yield calculation as a way of deciding whether a modification should be made to the loan's rate. Finally, he illustrates how the decision can be modeled in the context of the institution's balance sheet. This involves use of a simulation model to evaluate risk/return tradeoffs.
- Using technology to automate data delivery and analysis.
- Mississippi Fed Case - A solution.
- Pricing a 30-year fixed-rate mortgage.
- Marginal yield calculation - 5/1 ARM.
- Marginal yield calculation - 30 Year FRM
- Evaluating the solution's risk/return tradeoffs.
Making Effective Loan Pricing Decisions - Part 3
By Tom Farin
January-March 2001
In this third article in a multi-part series, Tom looks at pricing loans that do not meet secondary market standards and may not be offered by the competition. He makes the point that the most profitable loans are generally not commodities. He goes on to prove it using pricing techniques introduced in the first two articles in this series.
- Why most loans you originate are commodities.
- Developing and pricing non-commodity products.
- Self-insuring PMI on high LTV mortgages.
- Assumable 30-year fixed-rate mortgages.
- Why these market segmentation techniques make sense.