In this industry, as part of the lender due diligence process, the financials and credit history of every mortgage banking customer are combed over and scrutinized. Mortgage banks search for any and every detail to properly assess the probability of loan repayment. However, when it comes to their own financials, not all lenders give as much consideration to the details as others.
This outlook seems strange for a financial institution, given that they understand the need for granular data when it comes to their customers, yet many still function with high level views or incredibly intensive manual processes to get a semblance of granularity. Furthermore, the lack of detail typically means a lack of understanding of key financial metrics.
One struggle we hear often is that lenders don’t have the tools or time to get a granular look at the data. Lack of automation and technology seems to be an ongoing battle across the industry, with many banks choosing to continuously upgrade customer-facing systems, such as marketing tools and loan origination systems. With the complete understanding that those upgrades are invaluable to the company, decision makers tend to reserve technology enhancements that benefit the back-office departments, such as finance, to the back burner, if they consider them at all. For years, numerous industry experts have spoken on the importance of detailed financials that can truly come from innovative solutions, yet it seems that the message isn’t heard.
Those who continuing this narrative of the importance of granular data often equate a lender to a manufacturer. Even though this idea of a loan as a manufactured good is not a new one, there are many lenders that do not operate according to this logic. This continuous discussion is why, after more than 160 implementations, it still surprises us the number of departments that don’t accurately track their financials at a granular level, such as the loan or loan officer. Is a loan a tangible item that you can hold and take home? No! We all understand that, but it can still be considered a manufactured good. After all, it goes through a production line (of sorts) and at the end, customers have a product (the loan). With this rationale, if the chance of a manufacturer not knowing their per unit costs are incredibly slim, why would it not be the same for a lender?
Having access to detailed financial data, though, isn’t enough. Data is worth nothing unless it’s processed into information. By processing the data for executives, they have information that has logical meaning and carries significance. Furthermore, just like having a treadmill and never running on it, what a company does with the information is what truly makes the difference. Monitoring finances on a per unit basis gives better insight into business standards and trends and can help companies understand the different types of expenditures that may affect them.
Let’s look at an eraser manufacturer as an example. For a pencil cap eraser, the manufacturer’s machine presses and shapes 50 erasers a minute and wastes $0.01 per press. With a total of 20 machines producing erasers for 8 hours a day, in one work week, the company will see $480 worth of wasted materials. Now, if one machine starts wasting $0.02 worth of materials, an extra of $24 a week, there’s a high possibility that it will go unnoticed if the company isn’t tracking or familiar with their per unit costs.
Even further, imagine that the company produces four different styles of erasers, each being made by 20 machines. Each style is going to have a different cost, whether it’s due to the type of materials needed, the size of the eraser, the cost of the machines to make them, and/or the speed at which they are made. Once you add in the other three eraser styles, the chances of the company catching that extra waste cost is even slimmer.
Apply that same idea to a mortgage lender. Each type of loan, be it jumbo, FHA or conventional, has different associated costs and approval requirements and each loan officer most likely has a different commission structure, making each loan more unique than our individual erasers. If a mortgage accounting department doesn’t have the ability to see what costs are incurred by each loan and each loan officer, at the end of the day, the executives won’t be able to make informed decisions about the business.
Now there are hundreds of ways a mortgage bank can utilize their loan level data to understand their financial position and each bank has a different preference. However, there are three areas that every lender should be monitoring, and they all revolve around average leakage.
One of the biggest – if not the biggest – area that lenders experience leakage is in the expected versus actual gain on the sale of a loan. This leakage can come from a multitude of areas, including but not limited to concessions and fees. Imagine a lender is expecting to make an average of 100 basis points per loan but has a branch that constantly needs to offer a rate lower than par to borrowers and the bank is absorbing that cost. When it comes time to sell those loans, the price isn’t going to be as high as those concessions weren’t considered.
There is also a myriad of fees that can affect the sale price of a loan, such as reverifications. Not knowing the average cost of credit reports will make it impossible to catch when pull through rates are falling or increasing. If a lender has two loan officers and one is vetting their leads well, whereas the other is tossing any and every lead out there, hoping one catches, the credit report fees will be astronomical for the latter comparatively. Corporate won’t be able to catch this and amend it, whether the LO needed better tools or training or just let go, if they aren’t monitoring granular financial data.
Finally, lenders should be keeping track of their payroll cost per loan. However, we’re not referring to the wages of just those associated with the loan. This number goes beyond your loan officer, underwriter, branch manager, et cetera to include every person on the company’s payroll. To simplify, if a bank originates 100 loans in a month and their total payroll is $100,000 across the company, they are looking at a $1,000 average payroll cost per loan.
While we stress that this granular detail is imperative, in the end, it comes down to financial diligence. Having the detail isn’t enough if nothing is done with it. Once they gain access to the granular data, lenders should be analyzing the typical trends and standards that affect their financial position and utilizing that information to create actionable plans to improve across the company. In any industry, if a company isn’t taking strides to understand their financials and what truly affects them, it’s hard to believe they truly understand the business.
Beth Johnson is a senior consultant with the Project & Implementation team at Loan Vision, Greensburg, Pa., responsible for training, both virtually and in-person, as well as instructing her team of training consultants. From the first customer, all 170+ mortgage banks that have used Loan Vision have learned from her in some capacity, whether it’s been through initial trainings, monthly webinars, Super User Trainings, or at the annual Loan Vision User Conference.
This article was originally published in the September 15 issue of MBA Newslink.