The last two week brought us to Arizona, Michigan, Oregon and Southern California. The photo below is the historic Hollywood Theatre in Portland, Oregon. The venue is a really cool 86 year old movie theatre.
We have visited over 180 mortgage companies in the past 18 months. We’ve found that some companies struggle to make a profit and others appear to make money regardless of the origination channel, loan sale strategies or interest rate fluctuations. The actual business model does not appear to be a driver for profitable companies. What is common for profitable companies is management has a business plan and focuses on four key areas to help ensure the strategies needed to execute the plan are working. The four key areas are metrics, financial reporting, sales compensation and profits over production.
There is an old adage that says “if you can’t measure it, you can’t manage it”. We’ve found that successful companies are obsessed with granular measuring aspects of loan production, secondary market results and employee productivity. Production and gain-on-sale (GOS) metrics are sliced and diced by channel, investor, product, sales person, state, etc. Management also measures the expected GOS at lock/allocation with actual GOS at loan purchase to uncover any secondary market revenue leakage at the loan level. Successful companies set performance and productivity expectations/standards by mortgage operation function and measure each employee to ensure those expectation/standards are met. The standards help to uncover areas preventing the company from meeting its goals and objectives, and also can provides information on the company’s “sweet spot” and “train wrecks”. Smart managers will exploit and develop the sweet spots and either ditch or fix the train wrecks.
Public companies are required to generate financial statements shortly after month end. They are required to file SEC documents that provide accurate information about the financial performance of the company. Time and time again, we visit companies that generate quarterly financial statements or generate monthly statements 30 to 45 days after month end. The successful companies generate financial statements no more than 10 to 15 days after month end. The financial statements include any variance from the budget to help identify granular revenue and expense areas that need management and/or board level attention. Yes, successful companies do create a budget and measure the actual results with the budget.
Sales Employee Compensation
One of largest expense items on the profit and loss statement can be sales commission. All companies need good sales employees to help generate business and without sales there are no revenues. Most successful companies understand the concept and develop sales compensation plans that help ensure the goals and objectives of the company, and sale employees are aligned. A key component is to ensure the Company generates a minimum amount of gross profit from sales efforts, and incentive and compensate them to produce quality sales. More simply said, management develops a compensation plan that pays sales employees higher commission based on increase production, product quality and compliance with internal policies and procedures.
There is a great golf saying: “Drive for show, putt for dough”. We see successful operators focus on profits and return on equity over loan production. Higher loan volume does not guarantee higher profits. In today’s new mortgage banking world, higher profits can equate to higher risk; higher risk requires a higher return on equity. Successful companies set a return on equity boogie and continuously review the metrics and financial results to uncover any deficiencies or new opportunities that would help ensure meeting the required profits and return on equity.
While the four key areas of metrics, financial reporting, sales compensation and profits over production are not the only key characteristic we see in successful companies, there definitely is a common thread tying them together.
C. M. "Corky" Watts, CMB
Cameron Watts, CMB