REQUIRED READING: How To Take A Pricing Engine For A Test-Drive

re comes a time in the life of many mortgage bankers when the need arises for a pricing engine.[/b] More often than not, the need becomes apparent in a fairly obvious manner – when the reliance on paper is not efficient. ‘A pricing engine helped us increase our efficiency to accommodate the volume,’ says Jerry Kaplan, vice president of capital markets at Cherry Creek Mortgage in Greenwood Village, Colo. ‘We couldn't have done that without a pricing engine. Before we got a pricing engine, we were using paper sheets. We were sending out 25 different rate sheets a day, and handling the price changes during the day was cumbersome.’ For those who are considering their first pricing engine, and for those who may not be satisfied with their current model and need to revisit the product, there are several investigative steps that should be considered before investing in this technology. The first point is the reason for the system. Purchasing a pricing engine can often be seen as a reactive strategy to strong changes in how a company functions. Typical of this situation was the scenario experienced by Houston-based Envoy Mortgage. ‘Like most people, we came from paper,’ says Jim Hopkins, senior vice president. ‘But things began moving too quickly, and guidelines were all over the board. We needed to keep up as our organization grew, and we needed to be more competitive.’ When evaluating pricing engines, it is crucial to stay focused on the specific needs of the technology and the amount of time that you have to investigate all options. However, Cameron K. Brown, president of AMIT Consulting in Jersey City, N.J., points out that investing too much time reviewing systems has its disadvantages. ‘Don't waste time over-evaluating solutions for a highly complex problem,’ he says. ‘Chances are, by the time you complete this over-analysis and actually buy and customize the solution, the problem and available solutions will have changed.’ Brown adds that it is important to approach the acquisition of pricing engines with the specific understanding of what it can and cannot provide. ‘This is where it is critical to have that initial statement and key critical must-haves,’ he continues. ‘With that in hand, you should be able to make relatively quick work of initial evaluation to know whether you even have any real contenders and whether you need to even continue on with the evaluation, or if you can simply make a decision right then and there.’ [b][i]Hands on[/i][/b] Vendors who claim to be unable to provide access for a comprehensive product test-drive should be viewed with skepticism. Luiz Serva, co-founder and president of Prysma Lending Group in Danbury, Conn., spotted a Kremlin-worthy red flag when one pricing engine vendor balked at allowing him to conduct a full-throttle test-drive. ‘I could not test it in a live environment, which made me very suspicious,’ recalls Prysma. "Why would I have to pay for the product first and sign a three-year agreement before I could see it fully? The demo version was not enough for me.’ When it comes to testing the pricing engine, it is advisable not to limit the number of testers. Jeff Fogg, branch manager at Universal Lending Corp. in Pueblo, Colo., believes in wide involvement for pricing engine test-drives – even to the point of going far across the entire staff. ‘Most companies have two or three quality-control testers to roll a product out," he says. "I have 500.’ In some circumstances where staffers are using pricing engines for the first time, it is important to prepare them for the shift away from paper. Fogg, who focused for years on the subprime sector, recalls that many of his senior staffers experienced a cultural shift when the time came to automate. ‘My loan officers were used to the subprime world, where they would hand files to customer service representatives or account executives,’ he says. ‘When they came into the prime and Federal Housing Administration world, no one knew how to price things.’ While staffers may need to adapt to changes in automation, the technology itself needs to show flexibility in keeping up with changes in the industry and in working in synchronization with related mortgage banking systems. ‘In choosing a pricing engine, you need to evaluate the vendor's willingness to make changes to the product,’ says Serva. ‘Integration with paperless technologies and Web-based solutions is important. You also need to be specific on what you are looking for. Secondary marketing tools, paperless integration, report generation, ease of use, maintaining the current client base, etc. are some of the items a banker may be looking for.’ [b][i]Push back[/i][/b] When testing a pricing engine, it is important to push its abilities to the fullest capacity. Envoy Mortgage's Hopkins did his share of pushing and found most systems fell down under pressure. ‘We went through at least six to seven systems – everything from pricing services to automated engines,’ he says. ‘We sat down and went through scenarios. Some results were laughable.’ As part of the testing process, Hopkins recommends feeding intentionally problematic data into the pricing engine to see if the system would fall for errors that would be obvious to the veteran mortgage banker. ‘When we had our loan officers look at the system we are now using, we tried tricking the system by putting in Texas cashouts,’ he says, referring to the Lone Star State anomaly that prevents homeowners from accessing their homes' equity above 80% of the appraised value. ‘In Texas, we have limitations on what the loan-to-value (LTV) can be. If you put in a 90 percent LTV, which is not legal in Texas, other pricing engines might price that out. The loan officer could think, 'I have a price for that, so I can get approval.' If a pricing engine does not have an ironclad grasp on guidelines, there will be problems.’ Hopkins is no stranger to problems with pricing-engine data. ‘We had another pricing engine that was rife with inaccuracies," he adds. ‘We then began a fairly exhaustive study of other pricing engines. The flawed logic is that all pricing engines are created equal. They most certainly are not – I can speak from experience with it.’ [b][i]Dollars and sense[/i][/b] Furthermore, not all pricing engines come with the same price tag. Yet Hopkins warns that price tags shouldn't be the key to the ultimate purchase. ‘Don't put a price on the table until the very end,’ he warns. ‘Do not establish an idea that you are looking for the cheapest solution. Many people don't understand what that can cost in the long run, because accuracy is paramount. You should not have to settle for 'Well, it has some of what I want.'’ Cherry Creek Mortgage's Kaplan concurs. ‘If you run a centralized lock desk and accuracy isn't there, it could cost the company thousands of dollars,’ he says. Kaplan adds that mortgage bankers may want to explore the possibility of having two pricing engines in place – one as the primary system and one as a backup in case problems arise. ‘There is no 100 percent fail-safe technology,’ he says. ‘It is important to have some contingency plans in place.’ However, this is another alternative to relying on vendors or staying in a paper-based environment. ‘We built our own pricing engine,’ says Scott Everett, president of Supreme Lending in Dallas. ‘I was uncomfortable with the representatives and warranty statements. Was it easy to build it internally? No, it took a year and a half to build.’ But Everett is not planning to sell his proprietary creation to the industry. ‘I probably could market it,’ he says. ‘But I'm in the mortgage business, not the software business.&qu

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