In our commentary we often refer to a review process we perform on behalf of warehouse banks called FOCIS. These warehouse lenders request our services so they can get a better idea of the underlying risks associated with their mortgage banker counterparties.
After our study is complete –it is a long day of interviewing key management and staff -- we summarize our findings in a 30-40 page report. Our review covers 5 broad areas of risk:
(1) Financial and financial reporting
(2) Mortgage Operation
(3) Corporate Governance
(4) Secondary Market and Interest Rate Risk;
(5) Systems and Mortgage Technology.
There are a total of 70+ areas of risk within these 5 broader categories. We score each area 1-5 with 1 being low risk and 5 being very high risk. We provide a composite score for entire report based on the warehouse lender’s weighting requirements. As an added service we also offer a FOCIS-Plus review. FOCIS-Plus includes all of the above metrics, but we include specific recommendations to improve the lending operation's business model. These suggestions include: Ways to better manage risk, increase revenues, and reduce expenses
Many mortgage bankers request our services specifically for the FOCIS-Plus report. They view it as a “Tune Up”. In almost every case we provide explicit proposals intended to increase revenue without taking on additional risks. More and more of our warehouse lender clients are requesting the FOCIS-plus report as well.
Here are two common recommendations:
- Cost Reduction through Productivity Improvement: One step of the review includes a Q&A session with the Ops Manager. During this sit down we are looking to see if they have a model to measure productivity. We are also seeking information about specific process flows and the tasks expected to be carried out by staff. We then meet with individual employees – processors through post closing – to get their perspective on how the shop is run. There are some pretty good benchmarks available through the MBA that help managers set productivity standards. After we determine the number of employees supporting mortgage operations and the average number files funded for a 90 day period, we can determine productivity. If productivity is low, we advise management on ways to improve it, thus reducing costs.
- Increase Revenues through Actively Managing Interest Rate Risk: If we see a well managed shop writing more than $30 to $40 million a month though the retail channel, we discuss the risk rewards of moving to a mandatory commitment model. If management is disciplined, willing to develop solid risk management policies and procedures, and hire a knowledgeable employee to oversee the secondary market, we suggest they consider making the move. We also highly recommend companies use one of the hedging consultants that can provide analytics, reporting and advice to management. This move will increase revenues and most of pick up will go directly to the bottom line.
There is always an opportunity to grow profits without taking on additional risks. Sometimes it makes sense to engage someone to help you identify those new opportunities and point out areas of risk. Musicians become great musicians because they constantly take music lessons from many teachers. Athletes become great athletes because they have coaches to help them improve. If you are an owner or manager of a mortgage bank, think about bringing in some outside people occasionally to help you look for new approaches, processes and ideas.