Wednesday, January 26, 2011

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...
-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.

Tuesday, January 4, 2011

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.