How Rate Sheets Are Evolving With Investor Preferences

While rate sheets were once relatively simple – with one standard grid for a conforming 30-year fixed-rate loan – they are now far more complex, including pricing grids based on loan size, property type, state-specific adjustments, and more. For example, loan officers may now see separate grids for loans under $85,000 or over $300,000. There might even be pricing adjustments based on the census tract where the property is located.

This increasing complexity reflects changes in investor preferences and evolving government policies. Understanding these trends that shape more granular pricing models is crucial for navigating the modern mortgage landscape.

Collecting More Payments Over Time

Investors who buy mortgage-backed securities are not just interested in receiving an interest payment – they’re also scouting for loans that will pay for a longer period of time. The longer a loan stays in place, or its “duration,” the more interest the investor can collect. Characteristics that reduce the likelihood of early payoff (or "prepayment") enhance those loans’ attractiveness to investors.

One such characteristic is loan size. Borrowers who take out smaller loans (under $100,000) tend to be less sensitive to fluctuations in interest rates. As a result, smaller loans are less likely to be refinanced when rates drop, making them more appealing to investors seeking a steady stream of income. Additionally, in states like New York or Florida, where foreclosure processes are lengthy, loans are less likely to pay off early. By remaining on the books for a longer period, these loans create a more predictable income stream for investors.

The Rise of Specified Pools

These dynamics give rise to what are known as "specified pools" (or "spec pools"), which are collections of loans with similar characteristics that investors find particularly attractive due to their expected longevity. Spec pools are typically created based on factors such as loan size, state-specific foreclosure laws, and borrower credit profiles. The more "spec" a loan possesses, the more an investor is willing to pay for it – and that, in turn, directly influences the pricing sheets loan officers use to quote rates to borrowers.

Rate Sheets Reflect Investor Preferences

When investors demand loans with certain characteristics – like longer durations or slower prepayments – the lenders who create these loans pass along these specifications to brokers and dealers. These dealers then offer investors "pay-ups" for pools that meet specific criteria. For instance, if an investor wants a pool of smaller loans, they may be willing to pay a premium for those loans.

This information eventually trickles down to the rate sheets that loan officers use. If a loan meets the criteria of a specified pool, the quoted rate may be adjusted based on the investor's willingness to pay more for those specific loan characteristics. So, a loan for a property in New York or a smaller loan amount might come with a more favorable rate, as investors are willing to pay more for these loans due to their longer expected duration.

However, as these pay-ups vary by investor and loan type, requiring originators to continuously monitor changes in investor preferences and adjust their pricing strategies accordingly. This can create friction between originators and borrowers, especially when small changes to loan parameters – like increasing the loan amount by a few thousand dollars – could shift the borrower into a less favorable pricing bucket.

Government-Sponsored Loans

While we’ve focused here mainly on conventional loan products, similar trends occur in government-backed loans like FHA, VA, and USDA loans. Traditionally grouped together in mortgage-backed securities, we now see more specific pools created for FHA loans as investors begin to differentiate between the different types of government loans.

For example, VA loans typically have shorter lifespans than FHA loans because veterans can refinance more easily. As a result, investors are starting to price these two loan types differently, creating a larger gap in their pricing that will likely continue to grow.

Looking Forward: A More Granular Future

As investor demands become more specialized, we can expect to see mortgage pricing continue to evolve. The growth of specified pools, along with the increasing complexity of loan characteristics, will likely lead to even more granular pricing sheets. This means that borrowers may face even more nuanced pricing based on factors ranging from loan amount to property location.

For originators, this shift means staying attuned to changes in the secondary market. It also means having difficult conversations with borrowers about how small adjustments to loan size or other variables can significantly impact pricing. Ultimately, these changes in mortgage pricing reflect the increasing sophistication of the secondary mortgage market and the growing need for investors to find the most reliable, predictable returns.

As the industry continues to evolve, one thing is clear: mortgage pricing is no longer a one-size-fits-all proposition. It has transformed into a highly tailored, market-driven process that demands constant attention to detail and a deep understanding of investor preferences.

For more insight from Optimal Blue experts, listen to or watch the October 14 episode of the Optimal Insights podcast.