Enhancing origination revenue through price optimization modeling

January 2012
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Enhancing origination revenue through price optimization modeling

At a glance

Market factors like the current interest rate environment, population demographics, and competition, should be considered when modeling mortgage demand and the impact on price changes to consumer's price elasticity to realize potential improvements.

The economy continues to struggle. And while the low rate market has created refinance opportunities, those opportunities have not been sustainable due to property value issues.  Purchase opportunities have gained momentum, but the new lower agency loan limits will preclude a segment of the market, resulting in limited growth in market size.  

Understanding pricing dynamics within the framework of a company's revenue strategies, while remaining competitive, has never been more important. As companies realize the inefficiency and, in some cases, unreliability of these traditional loan pricing strategies, we believe a trend toward a Pricing Optimization – demand elasticity method that has roots in profit-based pricing will emerge, similar to those successfully deployed by the hotel industry, insurance companies, and online retailers.  

This paper discusses the core concepts and potential profit enhancement opportunities with creating a dynamic loan pricing strategy based on customer demand by using quantitative Pricing Optimization. Several market factors, such as the current interest rate environment, population demographics, and competition, should be considered when modeling mortgage demand and the impact on price changes to consumer's price elasticity in order to realize potential improvements