Monday, March 21, 2011

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!!!