I recently attended the Michigan Mortgage Lenders annual conference in Mt. Pleasant, Michigan. The group invited me to speak about current issues and trends in the mortgage lending space. I also provided a few observations on some of the good and bad practices we’ve been seeing while performing our FOCIS and FOCIS-plus reviews.
Here are some of the bad practices I shared with the group:
- Gain-on-Sale Revenue Leakage: Many mortgage bankers continue to ignore secondary market revenue leakage. This leakage is the difference between the expected gains at lock with actual gains at loan purchase. Some companies will perform a loan level reconciliation and identify there is leakage, but never address the reason why they are losing profitability. Others don’t even measure it or care to change the lock gain-on-sale to match the gain recognized at loan purchase. All companies should generate a monthly report to measure their revenue leakage.
- Measuring by Averages: We see many companies generating financial statements that reflect the overall revenue, expenses and earnings. What we don’t see is a drill downs of specific components. Companies should measure their revenue, expenses and profitability by channel, product and investor. Measuring by averages can sometimes hide issues or prevent the identification of a company’s true “sweet spot”.
- Focusing on Loan Officer Volume rather than Loan Officer Profits: Most mortgage companies still measure loan officer success and performance by loan volume. Volume is extremely important and without volume, there would be no opportunity to generate revenues. But in addition to volume, managers should also determine the amount of revenue each loan officer contributes to the company on a per loan basis. Overall value includes the amount of loan origination income, incidental fees and gain-on-sale. Every loan officer should be measured by the amount of value they provide to a company.
- Productivity: Many companies don’t have an effective way to measure the productivity of their employees. We see that most managers measure productivity by turn times, not the amount files that can be processed. The more files an employee processes, the result can be lower expenses.
Our next post will look at some of the good practices we are seeing today.