Over the weekend, my wife and I helped our friends transfer recently fermented Merlot into a 20 gallon French Oak Barrel for aging purposes. The use of oak barrels for storage affects the color, flavor, tannin profile and texture of red wine.  

The better the quality of the barrel, the more favorable impact it will have on the wine.  If a barrel is not properly constructed, wine can seep or leak out of the barrel and/or oxygen may penetrate the barrel.  Either of these may impact the quality of the wine, resulting in loss of revenue.
During our FOCIS- plus studies, we find many mortgage bankers have issues with leakage as well.  This leakage revolves around secondary market gain-on-sale (GOS) revenues and can have a negative impact on earnings.  Let me explain.

The price mortgage bankers deploy to retail and wholesale production channels is established by adding a secondary market margin to the secondary market investor price.  For example if an investor has a price of 101.000 and a mortgage banker wants to generate 0.50 of secondary market margin, the production price originators see will be 100.500.  If the loan closes at 100.500 and the loan is purchased by the investor at 101.000, the mortgage banker will earn the 0.50 that was built into pricing when the loan was locked.

Sounds simple, but we find many mortgage bankers end up generating less than what they expected when loans are purchased.  In essence, the mortgage banker expected to make the 0.50, but because of various issues – extensions, product violations, pricing adjustment issues, etc – the actual gain might be 0.25. 

We call this revenue leakage. What can a mortgage banker do to reduce or eliminate revenue leakage? 

Just as high quality wine barrels are predicated on a proper construction process, mortgage bankers must have a proper process in place to ensure loans are purchased profitable.  The following are processes profitable mortgage bankers have in place:

  • Centralize lock process and management
  • Utilizing a product and pricing engine connected directly to investor pricing
  • Using mortgage banking technology that supports secondary market activities
  • Perform an audit process at doc prep to ensure loan terms and pricing match lock commitment
  • Reconciliation of lock confirmation with purchase advice at loan settlement
  • Monthly loan level reporting of GOS by product and investor

GOS revenue leakage and wine leakage from barrels is not good for either business.  Any leakage is a waste and reduces the opportunity to make profits.