One of the key metrics wholesaler and correspondent lenders monitor on a regular basis is their clients' pull-through ratios.  A pull-through ratio reference the number of loans that come into a lenders pipeline vs. the number of loans they actually close.  Lenders would prefer their third party originator clients maintain high pull-through ratios.

A high pull-through ratio in conjunction with other strong performance metrics is a positive for all parties involved as it can lead to better loan pricing incentives and faster turn times for the TPO originator as well as increased productivity and cheaper hedging costs for the lender. From that perspective, it makes sense that lenders would provide additional privileges to customers with high pull-through ratios.

A mortgage banker who actively manages their interest rate risk using mandatory commitments must create internal policies to ensure their loan production team maintains a minimum pull-through ratio. Without proper lock policies and reporting methods, hedge costs can sky rocket when rates decline (or increase) and pull-through plummets. 

What about a mortgage banker who uses best effort commitments to manage interest rate risk? Let's say secondary has a group of loan officers who habitually break locks when/if mortgage rates decline. These are loans that secondary has committed to deliver to their investor...which will not be delivered because the lock was broken! While the implications of this behavior are not seen immediately via higher hedging costs, the consequences are felt down the road when the end investor ultimately deincentivizes you for poor pull-through. This hurts the entire operation, not just secondary or one loan officer. The obvious way to address this issue is to enforce minimum pull-through ratios via a clause in the loan officers employment agreement.  If they don’t comply, they are terminated.

Recently I heard about another alternative though.  Let me explain how this company approached this.

First, when dealing with loan officers who have a history of low pull-through, secondary might isolate this group and provide them with loan pricing that was 50 to 75 basis points higher worse than the pricing seen by originators who consistently met their pull-through ratio obligations. This strategy was easily implemented using an automated loan pricing engine.

Second, when these loan officers requested a lock, secondary confirms the lock with the loan officer, but didn’t lock with the investor.  After the loan was approved and it was clear-to-close, secondary locked with the investor.  If rates started to increase from the time of the lock until the loan was approved, the lock desk coordinator would immediately lock with an investor.  Because the lock provided to the loan officer had extra margin built into the price, the theory was the company still generated the minimum margin even if rates rose.   This removed the downside risk of dealing with an originator with a poor pull-through history but also gave secondary a cushion to protect the consumer in the event mortgage rates did tick higher.

Essentially, this company was writing a "Put Option" and the poor pull-through loan officer was paying for it via increased loan pricing margins. It is an interesting strategy, but the risks are very apparent.  A dramatic increase in rates could erode the entire margin and even create substantial losses to the company.  Furthermore, an unexpected adjustment in underwriting guidelines could also kill the deal.

This is a classic example of the tail wagging the dog though.  Management needs to create sound policies and then enforce them to ensure the entire operation is not harmed by one or two bad apples.