Planning for Success Planning for Success in THIS Marketin THIS Market

Mission Impossible?Mission Impossible?Presented by Michele Perrin, Presented by Michele Perrin,

Washington Mutual BankWashington Mutual Bank

Western Secondary Conference July, Western Secondary Conference July, 20062006

Mission Impossible?Mission Impossible?

Your Assignment:Your Assignment:Manage Your Mortgage Company Manage Your Mortgage Company

Through Changing Markets:Through Changing Markets:• Reduce CostsReduce Costs

• Maintain Adequate LiquidityMaintain Adequate Liquidity

• Avoid Repurchase RequestsAvoid Repurchase Requests

• Keep your Warehouse Lender HappyKeep your Warehouse Lender Happy

• Goal: Survive with Your Net Worth and Goal: Survive with Your Net Worth and your Warehouse Line Intact!your Warehouse Line Intact!

Biggest Risk Faced in this Biggest Risk Faced in this Market:Market:

Lack of liquidity Lack of liquidity

caused by:caused by:– LossesLosses– Unsaleable Unsaleable

loansloans– Repurchase Repurchase

requestsrequests

What is Liquidity?What is Liquidity?• Liquidity is your cash and assets Liquidity is your cash and assets

easily converted to casheasily converted to cash

• Allows the company to make Allows the company to make haircuts and margin calls required haircuts and margin calls required by lendersby lenders

• The resource used to negotiate on The resource used to negotiate on repurchase requestsrepurchase requests

• The life-blood of your businessThe life-blood of your business

• Can be added through equity, Can be added through equity, lines of credit or subordinated lines of credit or subordinated debtdebt

RESULT OF LACK OF LIQUIDITY:RESULT OF LACK OF LIQUIDITY:

RESULTS of Lack of RESULTS of Lack of Liquidity:Liquidity:• Loss of Warehouse Loss of Warehouse

lines lines

• Inability to fundInability to fund

• No source of incomeNo source of income

• Inability to meet Inability to meet obligationsobligations

• Shutdown of businessShutdown of business

• BankruptcyBankruptcy

• Potential loss of Potential loss of personal assets due to personal assets due to personal guarantiespersonal guaranties

The Survival Solution:The Survival Solution:PLANNINGPLANNING

““Success is not an accident—it is Success is not an accident—it is always accompanied by a plan.” always accompanied by a plan.”

--(Dave Hershman in Mortgage Daily, 5/25/04)--(Dave Hershman in Mortgage Daily, 5/25/04)

How to Protect Your How to Protect Your Liquidity:Liquidity:I.I. Plan Your Way to ProfitabilityPlan Your Way to Profitability

a.a. Project Your Operating Results and Project Your Operating Results and Staffing NeedsStaffing Needs

b.b. Find Profitable Products to originateFind Profitable Products to originatec.c. Project cash flows on a daily/weekly Project cash flows on a daily/weekly

basisbasis

II.II. Sell Loans PRIOR to FundingSell Loans PRIOR to FundingIII.III. Defend Against Repurchase Defend Against Repurchase

RequestsRequestsIV.IV. Get Additional Liquidity if Get Additional Liquidity if

NeededNeeded

Project Operating ResultsProject Operating Results

• Use a model to project income and Use a model to project income and expenses and predict your cash needsexpenses and predict your cash needs

• Use realistic production and marginsUse realistic production and margins

• Use projections to determine timing Use projections to determine timing and extent of expense cuts and extent of expense cuts

• Preserve capital by reducing staff earlyPreserve capital by reducing staff early

• Don’t wait until you see losses to cut Don’t wait until you see losses to cut staffstaff

Using Projections:Using Projections:

• Calculate number of loans each type Calculate number of loans each type of employee can handle in a monthof employee can handle in a month

• Create spreadsheet with various Create spreadsheet with various monthly volumes as the column monthly volumes as the column heading and each type of employee heading and each type of employee as a row headingas a row heading

• Plot out the number of each type of Plot out the number of each type of staff needed for each level of staff needed for each level of volume considered likelyvolume considered likely

Sell Loans PRIOR to FundingSell Loans PRIOR to Funding

• Unsaleable loans due to Changing Unsaleable loans due to Changing Guidelines are the Number One drain on Guidelines are the Number One drain on liquidityliquidity

• Forward Commitments do not typically Forward Commitments do not typically guard against guideline changesguard against guideline changes

• Bulk selling presents an unacceptable risk Bulk selling presents an unacceptable risk at this time for even largest sellersat this time for even largest sellers

• Flow selling to trusted investors on a prior-Flow selling to trusted investors on a prior-approved basis is least riskyapproved basis is least risky

Find Profitable Products to Find Profitable Products to OriginateOriginate

• Hard Money Loans (find financing Hard Money Loans (find financing first)first)

• Agency & HUD loansAgency & HUD loans

• Low Cost to originateLow Cost to originate

• Low risk of repurchase (Agency, Low risk of repurchase (Agency, Option ARMs)Option ARMs)

• Manage Commission CostsManage Commission Costs

Project Cash FlowsProject Cash Flows

• Helps to anticipate cash needs Helps to anticipate cash needs

• Plot out timing of sales and expected Plot out timing of sales and expected net proceedsnet proceeds

• Drop in all expensesDrop in all expenses

• Other cash outlaysOther cash outlays

• Determine expected total cash at Determine expected total cash at each end of dayeach end of day

Defend Against Repurchase Defend Against Repurchase Requests:Requests:

Defend Against Repurchase Defend Against Repurchase RequestsRequests

• Get servicing records from investorGet servicing records from investor

• Contact borrower to determine whether Contact borrower to determine whether payments were madepayments were made

• Bring borrower current through direct contact or Bring borrower current through direct contact or through broker interventionthrough broker intervention

• Go after brokers & borrowers for fraudGo after brokers & borrowers for fraud

• Hire a good advisor and/or attorneyHire a good advisor and/or attorney

• Re-negotiate Sale Contracts to reduce Re-negotiate Sale Contracts to reduce repurchase risk: EPD periods and Reps & repurchase risk: EPD periods and Reps & warrantswarrants

NeedNeed Additional Liquidity?Additional Liquidity?

• BringBring in Additional Capital from in Additional Capital from Current Owners or New InvestorsCurrent Owners or New Investors– Subordinated DebtSubordinated Debt– Preferred StockPreferred Stock– Common StockCommon Stock

• Borrow Short-Term MoneyBorrow Short-Term Money

• Sell Illiquid Assets-Real Estate, Sell Illiquid Assets-Real Estate, Investments, Repurchased Loans, Investments, Repurchased Loans, Stale LoansStale Loans

SummarySummary• This is a cyclical business-plan early and This is a cyclical business-plan early and

often!often!• Plan to Preserve LiquidityPlan to Preserve Liquidity• Pre-sell all loans prior to funding to avoid Pre-sell all loans prior to funding to avoid

guideline shiftsguideline shifts• Vigorously defend against existing and Vigorously defend against existing and

future repurchase requestsfuture repurchase requests• Don’t wait to cut costs-when you see losses Don’t wait to cut costs-when you see losses

on your financial statements, it’s too late!on your financial statements, it’s too late!• Beg, borrow or sell first born to get Beg, borrow or sell first born to get

additional liquidityadditional liquidity• Keep your warehouse line and your business Keep your warehouse line and your business

intact and get tointact and get to.…….……

Mission accomplished!Mission accomplished!