Monday, April 12, 2010

Opportunity Risk

I want to introduce a new term to the mortgage dictionary, "opportunity risk." Somewhat similar to opportunity cost, "opportunity risk" is the risk of focusing on items that you cannot control while not paying enough attention to the items that you can control. This can be quite damaging to the overall health of a lender and at the very least hinder growth.

Many of us spend so much time making assumptions completely out of our control. Where are rates headed? How will it affect the pipeline? Is the client closing? If so, when? We have all been at this long enough to know that many deals will fall out without good reason. It's out of our control.

Policies and procedures are well within your control. Through reporting, you can identify tendencies of your sales force. They are creatures of habit and once you identify them, you can use these habits to your advantage. How often does a loan officer request 45 day locks but look for pricing concessions? How often do they lock for 15 days and request free extensions? Certain rules and processes will result in a more efficient locked pipeline. The point here is that the more you truly understand your pipeline, you can take control and limit opportunity risk.

Opportunity risk is often concealed by profits. Are you happy with a good day? If you are like most, you are happy with receiving a daily trade report that is in the black. We all like to see gains, but is it enough? Are you digging deeper? On good days, you need to look into what you could have done to make it a great day. I guarantee that on your best day there are loans that could have closed and increased your profit but were not addressed because you were already doing well for the day/month. There is always more to be done and remember you control much more than you realize.

Being efficient, maximizing your gains, managing your cash flow, establishing a reserve strategy; it's all under your control. Make sure you're focus on the right aspects of the business. It's easy to get caught up with what's not in our control and then make up excuses of why you can't do this or that. Opportunity risk is dangerous.

If you hedge your pipeline this risk is even more magnified. Some of my worst days were when I knew I could maximize profits for the following month but did not set up a big enough reserve from the previous month to take advantage. There's nothing worse than having to pull back on volume, knowing the market was working in your favor, because you did not have the cash to fund the next 30-60 days. Knowing that you could have set up a record month but were held back due to a lack of planning and effective control is a tough pill to swallow.

Are you really focusing on items/issues under your control?
Do you make excuses for failing to hit goals?
How much "opportunity risk" are you taking?
Do you need help focusing on the appropriate issues?