Improving the Mortgage Lender's Bottom Line

by Jeanette Emmons, CPA, Senior Manager

The predictions seem to be holding true (well, the ones about mortgage volumes anyway): mortgage volumes were down dramatically for the first quarter of 2011. At the same time, expenses continue to increase thanks to continually more complex regulations, changing compensation rules and general inflation. So, since the world didn’t end, the independent mortgage banker is left with the task of managing the bottom line to stay afloat. One method I’ve found to be successful for improving net profit, is when management sits down with their balance sheet and income statement (with detailed revenue and expense data) and reviews, line by line, each item, considering opportunities for savings. Often assets can be redeployed, revenue producing products can be fine tuned and expenses can be renegotiated. Some potential discussion items are highlighted below to help you get started.

REVENUES FIRST.

If I heard any good news in the first quarter, there were some reports of higher per loan yields in the secondary market, chalk it up to good old supply and demand. If you’re still operating on a best efforts model, now might be the time to research other secondary marketing options. While volumes are down, management teams can put some time and effort into researching and implementing a more sophisticated and (hopefully) lucrative platform to bulk sale loans. If internal staff feel overwhelmed by this option there are several third party providers in the market place that can make this task far less daunting. If the Company is already trading in these markets, the third party providers are also available to review your internal secondary marketing efforts, possibly identifying dollars left on the table which the Company may not be taking advantage of.

MAKE YOUR MONEY WORK FOR YOU.

Increasing liquidity requirements from HUD and warehouse lenders are forcing independent mortgage banks to keep more liquid assets on hand than ever before. Generally, liquid assets are cash and investments with an original maturity of three months or less. If you find that you don’t require all this cash for your operations, consider purchasing three month investment products that can offer some return (albeit, a very small return). What can I say, I’m an accountant; I count every penny!

DIRECT EXPENSES.

There’s no way around paying direct expenses, however if you haven’t evaluated what you’re paying for some of these costs recently, it’s time to revisit this. I’ve seen some nicely negotiated volume pricing on many different products. Other lenders are realizing savings through involvement with mortgage focused co-ops. It’s also a good time to review operational procedures to ensure that unnecessary costs are not being incurred, for example, incurring credit or appraisal fees too early on loans that don’t materialize. Finally, avoid the warehouse non-use fee! Volumes may stay lower for a while so negotiate your terms with the bank. If they won’t bend on terms, adjusting available credit may help manage these fees. The warehouse lending market is not as tight as it was over the past few years; I expect that lenders will be willing to discuss reasonable amendments to terms or fees.

INDIRECT EXPENSES.

This is where the line by line review can really pay off. To compete for your business, most service providers are happy to evaluate your Company’s needs and provide a free quote. Let them! Providers to contact include insurance sales persons,office equipment lessors, office product suppliers and landlords. This can be a little taxing on your internal resources as you need to provide information and evaluate options (don’t do the whole income statement at the same time) but the reward can be significant.

When was the last time the Company completely re-evaluated employee benefits? Improvements here can save the Company money and may also make for happier employees. You may find that you’re able to offer better options or pass some savings on to the employees. Health insurance is a very large expense to every employee and company. Are you offering your employees the best options for the price? Have you explored high deductible or self insurance options? Do you offer employees pre-tax options for health and dependent care costs that come at very little cost to the Company? And remember, health insurance isn’t the only insurance product that should be reevaluated; don’t forget the liability, key man and fidelity policies.

If your office lease is up for renewal (and maybe even if it isn’t) take advantage of the plethora of commercial property available for lease. Do some research and then let your landlord know that there are a lot of options out there that could save you money. Do the same with office equipment leases or purchases, office supplies and even printing costs for direct mail advertising.

In summary, leave no stone unturned. In today’s economy every business has an obligation to manage costs. More importantly to you, nearly every business recognizes the need to compete for business, leaving the door wide open for negotiation on terms, prices and so forth. Look at where you spend your money and then explore options that would allow you to spend less of it. A word of caution however, sometimes you really do get what you pay for. Make sure you’re not sacrificing too much quality to save a few dollars. For example, the name brand of your office paper may not matter to you (save money here), but a poor health insurance provider, who denies claims or makes life difficult for your employees, can be detrimental to employee morale (be more careful when trying to save money here). Always end every decision making process on expenses with a risk / reward analysis to help management focus in on the best overall solution for the Company.

© 2011 WithumSmith+Brown, PC