Locking Made Easy

I can't understand how there are so many firms that haven't streamlines their pricing and lock process. Just about every pricing engine is integrated with the large LOS players and trust me, there is NO good reason not to take advantage. Of course there could be some holes in the integration but those can be filled with some custom LOS work.

A manual pricing and lock process means sales and secondary working in two systems. Dozens of data entry fields, emails, faxes, poor audit/tracking mechanisms and you have a labor intensive process with numerous areas of exposure creating data integrity concerns. All we hear about now is the rising cost of originations and how each file takes so much more time and effort. If lenders are looking to streamline their process and improve efficiencies, they should tart with their pricing procedures. This integration could double the output of their lock desk and give sales more time to actually speak with clients!

And for the firms who are hedging or delivering via mandatory or direct trades, this process is essential to trade managing positions effiiciently.

What is everyone waiting for?!?!?!?!?!?!

Who's Compliant?

It's the topic that just won't go away. Over the last three weeks I spoke with five lenders who, in my opinion, are clearly violating the new LO comp regulations. The crazy part? They all honestly believe they're in full compliance. I can only imagine how many others are out there and then add those who know they're being aggressive and pushing the envelope. Here are some of my simple tests:
-Can sales offer premium pricing?
-Is premium pricing always used as a lender credit?
-Can sales charge origination fees?

If you answer Yes, No, Yes, you may have an issue. Hey, I understand there's nothing explicitly forbidding these practices but take about a red flag or better yet a smoking gun! All a regulator or auditor (whoever they may be) has to do is ask "Why?" And you know what, there's no sound response that won't convince them these policies are going to in some way compensate sales. Why else would an LO choose to sell higher rates and fees? We all know they aren't looking to make originations more challenging! And we all know the regulators are will be looking to levy fines right out of the gate.

There are countless plans which allow for corporate objectives and profit margins to be maintained, some are compliant and others not so much. Lenders out there better think hard and be careful.

Great time to revisit your pipeline

Great news!!!!Rates are the lowest levels they have been all year. This is a great opportunity for companies to revisit applications that have been made this year and found that rates were too high at the time of application. The recent drop in rates opens up a lot opportunity for your interested clients that came through in the first quarter. It is a great time to be running reports out of your LOS to revisit these applications and see which ones could now qualify. There are deals there and you could really be the hero to a client in need of a refinance.

Cyling Secondary Profits?

When the LO compensation changed in the beginning of April, companies took various ways to cycle out the old compensation deals while starting up the new deals. We are seeing that many companies are not really doing a lot of forecasting to see when the old deals will cycle out and what effect it will have on the P/L. On the flip side, the new deals carry a different cycle which should be starting to hit the books in the next few weeks. Make sure you have a handle on the P/L effect of the old comp phasing out and the new comp plan phasing in. Know your rules and understand how each affects your profitability over the next 30-60 days.

NMLS report- Due May 15th

The NMLS call report is due on May 15th. Have you completed your reporting yet? If you are not familiar with this reporting here is a quick summary:

The Mortgage Call report is filed by the company on behalf of its originators. The report is not filed by individual mortgage originators.

The Mortgage Call Report is a requirement of SAFE Act. All licensed Mortgage Broker and Consumer Loan companies who make, service or broker loans secured by residential real estate must file the report.

In addition, exempt companies who employ licensed mortgage loan originators must also file the report.

The Mortgage Call report must be filed 45 days after the end of each quarter through the NMLS. The May 15th filing covers business in the first quarter ( January 1,2011 through March 31, 2011)

Hope this helps.

Rate reaction

Rates have come down over the past week and are at their lowest levels all year. Applications rose last week and your lock desk and pipeline should have seen a pop over the past few days. You should have a plan (even if just in your head) about what reaction you should be seeing in response to rate increases or decreases. Do you revisit prior, aged prospects and applications that could be in play now that rates are down up to .5%? Do you look at your margins and see if they are in line with the market movements, or are they stagnant? Do you look at your hedge coverage and make any modifications to your pull through assumptions? Basically, rate movements (both up and down) can and will have an effect on your pipeline, volume, and profitability. What are you doing to react to them?

How is your lock activity?

Rates have come down over the last week and are now at the lowest levels they have been all year. Your lock activity should have seen a bounce and your pipeline should have felt a boost.
Refinance applications have started to climb based on the rate drop as well. Are you using any methods to trigger your actions when there are rate movements like this? Everyone has borderline loans from Q1 that never moved forward. There should be a plan in place (if even in your head) of what to expect when rates move up or down. You should be reviewing your aged pipeline to see what deals may now be able to come back to life. You should be looking at your margins and making sure that are reflective of the market - and NOT stagnant. You should look at your hedged pipeline and look at your historical pull through to see if it needs to be adjusted. Many little actions add up to profit when you react. Do not wait as you do not know how long rates will stay at this level.

NMLS Call Reports

Quick question for mortgage bankers - Who's handling the Q1 NMLS call reports for your firm? If you hesitated, it's time to move this up your list of key items to address. If you were one of the VERY few bankers which confidently answered that question, here's a quick follow-up - How are these reports put together? Some LOS's have built out functionality but data integrity and HMDA issues are likely to rear their ugly head. Here are some quick thoughts relating to these new NMLS Call Reports which must be submitted in exactly one month from today:

• Talk about increasing your operational costs. These reports are only due once a quarter but they could be as daunting as an additional audit. I can see key personnel from QC, Compliance, Ops, or Management taking a week out of their schedule to compile this data.


• The more complex the operation, the larger the task. Call reports need to be broken down on a state and loan officer level, not to mention retail, wholesale, and servicing platforms.


• Look out for HMDA red flags. Too many lenders deny, cancel and withdraw files but then actually close them. Think about this a bit as it's not exactly kosher.


• Files with missing or inaccurate data will cause inaccurate reporting. Are certain key fields left blank in an LOS? Do files sit in the pipeline for months without being decisioned or moved to a new status or folder?


• Rumor has it that these reports may be referenced by the Consumer Finance Protection Bureau to help monitor lender compliance with new regulations (LO comp, Dodd-Frank etc)

These call reports are pretty detailed and for large firms operating in multiple states with multiple business channels, putting them together will be pretty taxing. With the banking conference in two weeks and the reports due shortly after, many lenders really have about two weeks to get this data and process ironed out.

The Stay Is Over

Well April 1 turned into April 6 and the hope was pretty short-lived. All new LO compensation schedules and rate sheets were rolled out today, or should've been!!! Think that was the hard part? I wonder how many bankers thought this whole change through. How will weighted average margins be affected? (i.e. NET revenue) Were lock policies and guidelines updated? I sure hope so. Were margins updated and how so? I see costs increasing and therefore rates which may translate to non-competitiveness in the market! No? The bankers who kept everything status quo will see their revenue plummet in the coming months. Striking the right balance is a delicate dance. How about the wholesale channel - brokering loans out and taking in TPO files. What a mess. Dozens of custom rate sheets, originating loans at losses, ensuring partners are compliant and don't get me started on the safe harbor nightmares - I still haven't heard one solid plan from any originator for that. Who's modeled out the implications here? Nobody is immune!!! -If margins (and rates) aren't up, they're down; either way volume and revenue will see a change. -Limit options for sales and both volume and fees tighten -Think loan officers have their head in the game? We're not even a week into April and I've heard from dozens of LOs looking to make moves and exit the mortgage game. Some will struggle, others will succeed. I see a bright future for only those with their eyes wide open.

AAA - All Bout Allocation

Product Allocation
Most bankers are managing their margins by product. If they're not they soon may be with the compensation regulations coming on 4/1. FHA vs Conventional...Arms...203ks...high balance...VA...USDA, each have their own margin.

Everyone tracks volume but how many lenders are tracking, managing and manipulating allocation? 50M may be a great volume target and keep Ops busy, but if typically allocation is 60:40 FHA to Conventional and the pipeline shifts to 60:40 Conventional, there's likely to be a significant swing in blended or weighted average margin and therefore, net revenue. Volume could even increase which keeps everyone patting themselves on the back but if there's a shift in product allocation, more volume and increased overhead and overtime could equate to less net revenue! Volume tells you half the story, allocation tells you the entire story. Shouldn't a secondary marketing and capital markets department be more than a lock desk; proactively managing and manipulating margins and product volume is the important piece which requires specialized skills.

And how about origination allocation? The delineation between a wholesale channel, branches, and various retail operations are critical as each source is likely to have it's own revenue model. Costs to originate, secondary margins and total revenue on wholesale loans are not the same as retail. Many firms will even see differences between various retail groups depending on fixed costs, marketing, pull through, compensation models etc etc.

Lastly, how many secondary marketing departments focus on investor allocation? Maybe secondary does some sort of best-ex pricing and determines which investor will be targeted. Believe it or not, at some firms Loan Officers are making these decisions - YIKES! Hopefully this doesn't continue post 4/1. Investor allocation is key as volume is a lenders asset and when selling any asset there are methods for negotiating the best possible price. Leveraging volume for optimal pricing is essential to recognizing a firms full potential. Volume incentives, SRP variances, improved price bids, etc etc - all investors are hungry for volume in 2011 and are willing to pay for it. Even if I take pricing out of the equation, it's not the only factor in targeting an investor. How about the ease of clearing stips or the frequency of denials? Are pre-purchase review turn times slow at times? These issues impact costs and exposure and therefore impact the bottom line.

It's All About Allocation!!!

GSE Reform

So the big news late last week came from Washington as the President released some rough details on possible GSE reform. Of course there weren't too many details and specifics on Fannie and Freddie but mortgage bankers did get a few unexpected curve balls that surprisingly haven't garnered as much attention as one would have thought.

Key updates to note:
-Max ltv to be lowered on Agency programs. Expect Fannie/Freddie to require a 10% down payment and a maximum ltv of 90, down from 95. Expect this to push some more volume toward FHA programs.

-Temporary high balance loan limits are set to expire in October. This will mostly affect those in the northeast and California. A re-set from 729k back down to 625k could certainly hurt some regional real estate markets. It would be a little too presumptuous to count on the private labeled jumbo products to support this portion of the market.

-Although you wouldn't think FHA loans would included in this GSE reform, they're party of the party as well. Expect the annual MI premiums to increase by .25% come mid-April; I'm thinking case numbers on/after 4/15 but we'll just wait for the mortgagee letter. This isn't a tremendous increase but it will have an impact on affordability and qualifying and it's just another item for management and IT to implement and track.

Sure there are more immediately pressing issues facing mortgage bankers right now, but these updates cannot be ignored.

Do You Really Use Your LOS?

From some recent discussions, I've come to realize, most mortgage bankers only use about 20-30% of their LOS's functionality. The Loan Origination Systems continue to improve each day. The releases, updates and integrations with business partners are non-stop. Many updates are focused on compliance, but there are other features being built into the LOS's that can help sales, operations, and secondary.

I see most divisions build work-arounds to a process that can easily be streamlined. Others are literally clueless as to the services available simply because nobody sat them down to explain the detailed functionality of the LOS. Over the last few months I've even met a number of bankers who were working in broker-based systems with zero banking functionality. Really? Seriously?

Here are just a few hints that you're likely under-utilizing your LOS:
-Ops department still has racks of files on their desk
-Certain data is manually entered and managed in spreadsheets
-Lock requests and/or file updates rely upon email and phone calls
-Between disclosures and credit/closing packages, you're Fed-Ex bill hit record levels in Q4 '10

Econ 101 Redux

It's been a few weeks, I guess you can say I've been hibernating considering how badly the Northeast has been buried in snow.

So a few months back I wrote about the basics of your college Econ 101 class and how supply & demand curves effect prices. In volatile markets, how many lenders are following the basic economic foundation much of capitalism and free markets are based upon. If prices prices and margins are flat, you're doing something wrong.

A few months back it was time to raise margins. Ops departments were working at maximum capacity, warehouse lines were stressed and investor turntimes were delayed. Lenders were operating with a limited loan supply and high demand. I fear too many missed the boat on that one and failed to recognize revenue that was well within reach, OUCH!

Now fast forward to present day and the market has done on 180 on us. Volume is off upwards of 50%, so demand has waned while supply is up. Ops staff is just waiting for business at this point. That supply & demand curve is inverted which leads to lower prices. If volume is down 50%, the lender may have missed those first few Econ 101 lectures. I can tell you fact certain that lenders are losing business for 25-50bps in price or .125-.25 in rate, and it's a shame!

Managing margins is so much more an art than science so be careful...
Example:
-Say you originate 50M with a 1pt margin, forecasting 500k in revenue.
-Dropping to .75 margin and increasing volume to 60M would leave you @ 450k.
-Generating 50k less is a losing proposition BUT there's some upside, right? Increase sales morale which is infectious in the retail space - increase junk fees by 20% - and if payroll is based on splits, that's a win too.
-An increase to only 55M would be a mess with revenue @ 412.5k while reaching 70M would be a home run with revenue @ 525k.

All firms are different and if volume is slow, what better time for a banker to think about their own economics.

The First Domino To Fall

April 1 is just around the corner and although there's a lot of industry talk, there's been little action. Speaking to clients, attending workshops, and following online sessions, most bankers fall into one of a few categories.

1. You have done some research but are still not yet well-versed in the finer details and restrictions of the bill. Some know they're in this group; unfortunately there are many who believe they have a much stronger understanding than they actually do.

2. You have a good understanding of the bill and are either looking for loopholes/work arounds, simply hoping the 4/1 date is pushed back, or hoping the GOP repeals it completely.

3. You have a good understanding of the bill but are struggling to figure out how to maintain both margins AND talented loan officers/managers.

I've yet to speak with or here of any firm who is confident they have a strong action plan and are ready for April 1. If they do, they're certainly keeping their plans a well kept secret. Some good ideas are floating around and there has certainly been increased attention given to the subject over the last month or so but many in the business are looking to each other for guidance.

No lender wants to be the first to make an announcement; nobody wants to be the first domino to fall. Bankers, especially those in competitive local markets or with numerous branches are afraid they're "missing something" - so they're anxiously waiting. Waiting for other ideas or for other firms to give them a little confidence their thoughts are in-line with the market. I have a feeling once one or two lenders make their announcement, the rest of their local market will quickly follow suit, just like a set of domino's.

Some additional thoughts...
-Have you appointed a manager or task-force to formulate your gameplan? Whether it includes employees or outside counsel, every business model is different and will require a different approach. I'm not even employed by a lender but I spent my New Years weekend thinking of how this bill changes not only rate sheets and compensation, but also margins, splits, overall revenue for the firm, policies, payroll cycles, employee reviews, reporting and oversight. It's a handful!

- Make sure you consult with a law firm or attorney who is well-versed in this matter. Going to a seminar probably isn't enough; if you think it is, give me a call.