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.