Revisiting Revenue Leakage. Time to Call in a Mortgage Plumber

There is nothing worse than a leaky pipe and the resulting water damage it causes to a home.  Sometimes the leak is obvious and water gushes out creating a mucky mess in all directions.  Generally this can be cleaned up fairly quickly without long term damage.  Other times the leak is hidden behind a wall or underneath the floor.  The hidden leaks may go on for months, creating long term damage like dry rot and mold.  In the end, the hidden leaks and resulting damage can be extremely costly.  

For one, hire a good plumber to inspect the pipes or monitor the main water meter.  If the water isn’t on at the house and the meter is running, there’s probably a leak somewhere.  Or maybe, consider replumbing the home if the pipes are old.  Preventive and corrective actions may be beneficial in identifying and resolving hidden plumbing problems.  

What does a plumber and a leaky pipe have to do with mortgage banking? 

We’ve been writing about secondary market revenue leakage for several weeks now.  We keep revisiting it because the issue continues to grow in size throughout the industry.

We have seen, over and over again, mortgage bankers generating less and less gain-on-sale (GOS) than expected (GOS at time of lock vs. GOS on purchase advice).  The difference between the expected gain and actual gain is what we call “revenue leakage.” 

Let’s revisit a few reasons for “revenue leakage”:

1. Unaware Of The Issue:  We find some mortgage bankers don’t know they have a problem because they don’t closely monitor changes in GOS.  Often times this occurs when the investor lock price and margin are altered in a company's loan origination system after the loan is purchased. In essence, someone changes the original lock price and gain-on-sale to match the figures on the purchase advice.  If this occurs, there is no way to measure the difference.
2. Pre-Purchase Issues:   One key reason for leakage is the result of investor pre-purchase conditions.  Pre-purchase conditions occur when there is a guideline violation because of credit, product or compliance issues.  These conditions can cause delays in the loan purchase which  can result in extension fees or even having to resell the loan to another investor at a loss.  
3. Product Pricing Issues:   Another leakage issue occurs when investors unexpectedly assess a pricing adjustment at loan purchase.   Generally this happens when the characteristics of a locked loan change before the loan is funded.  We find many companies implement a pre-doc prep loan reconciliation to ensure the lock confirmation, underwriting disposition and doc request have same loan characteristics. 
   
4. Sloppy Lock Policy and Bad Reporting  Data:  A slopping lock policy or bad pipeline reporting data can result in an over hedged position.  An over hedge position can cause unexpected pair outs of commitments because a company is short loans.  If the market improves, an over hedged position will create hedge losses.   

There’s several other sources of GOS leakage that result in a reduction of revenues.  The key is to monitor each loan to ensure there is little or no difference in the expected and actual gain-on-sale.  Just like hidden plumbing leaks in a house, revenue leakage may not be obvious. Sometimes it makes sense to call a “Mortgage Plumber” to tell you the source of the leaks and provide you a specific plan to fix them.