It is important to have a map or GPS when taking a trip.
Without guidance, the journey may take much longer and travel
costs could unexpectedly grow. This concept applies to mortgage bankers as well. Managers need a plan to navigate the market's landscape, without one costs can unexpectedly rise and profitability can suffer.
We recently launched a new product for our
customers. It is called Management Advisory Program, or MAP as we refer to it. The program is intended to increase mortgage ops
revenues, control costs and better manage risk.
A key
component of the program is a monthly comparison of a company’s
financial results and key metrics with the financial results and
metrics of other participants in the program. Most of the participants
originate under $100M per month and produce loans through retail or
wholesale channels.
Some of the key financial results we review and compare are:
- Commissions Collected
- Incidental Fees Collected
- Commissions Paid
- Net Gain-on-Sale (GOS)
- Net Interest
- Cost to Produce (loan level expenses)
- Net Revenues
- Personnel Expenses
- G&A Expenses
- Pre-Tax Earnings
Most might consider this a typical financial statement format used by mortgage bankers and brokers. However, as we launched the program, we found many types of financial statements and various labels/definitions for income and expenses. While the format did not impact net earnings, it did provide a challenge in comparing key financial results among participants.
Let’s look at two areas:
Revenues: Many companies combine commissions, fees and GOS into one
category called loan fees. We believe its important to break out
the various revenue sources and track them over time. Monitoring
revenue sources may be helpful to drill down on reasons for declining
net revenues and earnings. Sometimes a drop in GOS may be the result
of revenue leakage from aged loans or pricing mistakes in secondary.
Without breaking out revenue sources and tracking them, it will be
difficult to pinpoint problems.
Expenses: We found some companies combined loan level expenses and general costs of origination into one broad expense category. We believe there are two distinct expenses in a mortgage banking operation: General company costs and loan level expenses.
- General company expenses are the operational costs or expenses associated with running the business. Costs such as employee salaries, benefits, rent, phone, insurance, legal, etc are all expenses specific to operating the business.
- Loan level expenses are costs necessary to produce a loan. These expenses include automated underwriting services (AUS), doc prep, fraud detection, appraisals, credit reports, etc.
Both
types of expenses are important to track and manage over time. Tracking and analyzing these expenses separately is a key element in earnings growth. We often tell our clients that “the one part of the business an owner has control over are the expenses.”
In order
to effectively benchmark financial results and metrics, labels,
definitions and format should be consistent. As we work with clients
on the MAP program, we will be suggesting all participants use the same
approach to generate metrics and financial statements.
