Q1 Advisory Observations: Tighter Pricing Spreads, Higher Per Loan Costs, Less Earnings

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Our Management Advisory Program (MAP) results for the first quarter 2010 are starting to come in.   A key component of MAP is to measure key financial results in basis points. We measure top line revenues, gain-on-sale, compensation, G&A expenses, pre-tax earnings and other components of the financial statements. 

Before discussing some of the results, let’s describe how basis points are calculated. 

Basis point is a key way for mortgage bankers to measure the financial results and measure those results with their peers.  Simply put, it takes any financial component of the profit and loss statement and divides it by the amount of closed loans in that the financial period to generate those components in basis point.

For example, if the gain on sale amount was $100,000 in April and the company closed $50M in loan production, the gain-on-sale in basis points would be 20. 

The mathematical equation of this example is: (($100,000/$50,000,000) X 10,000) = 20 basis points or 0.0020%.

Here are some of key findings from our MAP clients:

  • WEAKER EARNINGS: As expected, earnings results were not very good for the first quarter compared to 1Q 2009.  Most of our clients stated two issues:  Seasonal downturn in January and February loan volume and adjusting to the new RESPA regulation.   Gain-on-sale results were lower because lock extensions and pre-purchase conditions relating to issues with RESPA.
  • TIGHTER PRICING SPREADS: Clients saw spreads narrow between best efforts and mandatory commitments, with almost no spread between single loan mandatory and single best efforts commitments today.  Delivering loans into AOTs and Direct Trades still result a decent spread, but not near the 50-70 basis points seen in 2009. Best performers sold loans through mandatory commitments and kept expenses well under 100 basis points
  • HIGHER  PER LOAN EXPENSES: With volume dropping, expenses per loan in basis points rose during the 1st quarter for most clients.    This occurs each year for mortgage bankers during the seasonal downturn in January and February.  Volumes did pick in March for all participants and we should see a reversion to normalcy in the second quarter. If volumes don’t pick up, managers/owners will need to make appropriate personnel cuts to reduce expenses.
  • RETAIL NO BETTER THAN WHOLESALE: There was little difference in pre -tax earnings for retail or wholesale channels.

Converting all your financial results into basis points is an effective way to measure results from month-to-month and quarter-to-quarter.  It also allows management an approach to measure financial results with other mortgage bankers.  Even though some accounting software does not have tools to convert financial results into basis points, they all have export functions into excel.  We at Garrett, Watts & Co always say:  “If you can’t measure it, you can’t manage it.”