surviving changing markets mission impossible?. mission impossible

21
Surviving Changing Markets Mission Impossible?

Upload: edward-jefferson

Post on 25-Dec-2015

256 views

Category:

Documents


7 download

TRANSCRIPT

Page 1: Surviving Changing Markets Mission Impossible?. Mission Impossible

Surviving Changing MarketsMission Impossible?

Page 2: Surviving Changing Markets Mission Impossible?. Mission Impossible

Mission Impossible

Page 3: Surviving Changing Markets Mission Impossible?. Mission Impossible

Your Assignment

Manage Your Mortgage Company Through Changing Markets:

• Minimize Product Risk

• Avoid Repurchase Requests

• Reduce Overhead at the Right Time

• Keep your Warehouse Lender Happy

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

Page 4: Surviving Changing Markets Mission Impossible?. Mission Impossible

Causes of Changes in Mortgage IndustryInterest Rate Cycles • Graph of Interest Rates from 1980 to

2003– Includes Mortgage Origination Volume

– Employment in the Mortgage Industry

• Change in Products Acceptable to Investors– The primary cause of the current downturn is

the use of stated income to “qualify” borrowers for loans they cannot afford to pay

Page 5: Surviving Changing Markets Mission Impossible?. Mission Impossible

Mortgage Industry Cycles

0

200

400

600

800

1000

1200

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

0%

3%

6%

9%

12%

15%

18%

ORIGINATIONS (BIL. $) EMPLOYEES (THOUS) 30-YR FRM (%)

Source: Mortgage Bankers Association of America

Page 6: Surviving Changing Markets Mission Impossible?. Mission Impossible

Risks Faced in this Market

• Repurchase requests

• Unsaleable loans

• Lack of liquidity

• Lack of Net Worth

• Excess Overhead

• Changing Loan Guidelines

• Loss of Warehouse lines

Page 7: Surviving Changing Markets Mission Impossible?. Mission Impossible

The Survival Solution:PLANNING

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

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

Page 8: Surviving Changing Markets Mission Impossible?. Mission Impossible

Planning and Evaluating Options• Defend Against Repurchase

Requests• Sell Loans PRIOR to Funding• Get Additional Liquidity if Needed• Know Your Breakeven Point• Make Cost Cuts Until You are

Profitable• Avoid Warehouse Default by

Keeping Covenants

Page 9: Surviving Changing Markets Mission Impossible?. Mission Impossible

Defend Against Repurchase Requests• Get servicing records from investor• Contact borrower to determine whether

payments were made• Bring borrower current through direct

contact or broker• Go after brokers & borrowers for fraud• Hire a good advisor and/or attorney• Re-negotiate Sale Contracts to reduce

repurchase risk: EPD periods and Reps & warrants

Page 10: Surviving Changing Markets Mission Impossible?. Mission Impossible

Sell Loans PRIOR to Funding• Changing Guidelines are the Number

One reason that mortgage companies have been failing

• Forward Commitments do not typically guard against guideline changes

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

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

Page 11: Surviving Changing Markets Mission Impossible?. Mission Impossible

Lack of Liquidity

• Liquidity is your cash and assets easily converted to cash

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

• The resource used to negotiate on repurchase requests

• The life-blood of your business• Can be added through equity, lines of

credit or subordinated debt

Page 12: Surviving Changing Markets Mission Impossible?. Mission Impossible

Know Your Breakeven Point: • In order to plan your success, you

need to know your breakeven point.– Must be able to split fixed versus

variable costs– Formula:

Indirect Expenses divided by Net Revenue Percentage

Page 13: Surviving Changing Markets Mission Impossible?. Mission Impossible

Breakeven Calculation

1. Calculate Indirect Expenses (total expenses less commissions and loan-related costs)

2. Calculate Net Production Revenue as a percent of Indirect Expenses

3. Divide Indirect Expenses by the percentage derived in #2

Page 14: Surviving Changing Markets Mission Impossible?. Mission Impossible

Breakeven Example

• Monthly Production of $30MM

• Revenue of $300,000

• Total Expenses of $225,000 include:– Commissions of $100,000– Direct Loan Expenses (appraisals,

credit reports, underwriting fees, Etc) of $50,000

Page 15: Surviving Changing Markets Mission Impossible?. Mission Impossible

Breakeven Example Revenue as a percent of production:

Assumptions: Calculate Net Revenues:

Production $30,000,000 Gross Revenue $ 300,000

Less Direct Expenses:

Total Revenue $ 300,000 Commissions $ (100,000)

Expenses: Other Direct Costs $ (50,000)

Commissions $ 100,000 Net Revenues $ 150,000

Direct Loan Costs $ 50,000 Divided by Production $ 30,000,000

Other (Indirect) $ 75,000 Net Revenue as % of Production 0.50%

Total Expenses $ 225,000 Indirect Expenses: $ 75,000

Divided by Net % Revenue 0.50%

BREAKEVEN $ 15,000,000

Page 16: Surviving Changing Markets Mission Impossible?. Mission Impossible

Project Your Staffing Needs:• Calculate number of loans each

type of employee can handle in a month

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

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

Page 17: Surviving Changing Markets Mission Impossible?. Mission Impossible

Make Cuts When Production Falls• The best way to preserve capital is

to reduce staff as quickly as possible

• Don’t wait until you see losses to cut staff—use your projections to determine timing

Page 18: Surviving Changing Markets Mission Impossible?. Mission Impossible

Warehouse Line Default RiskMajor Covenants include:

• Minimum Net Worth Covenant

• Maximum Leverage

• Minimum Liquidity

• Restriction on Losses

• Restriction on Distributions

Page 19: Surviving Changing Markets Mission Impossible?. Mission Impossible

Covenant Formulas:

• Adjusted Net Worth: GAAP Net Worth less officer receivables, illiquid assets (real estate, stock); plus subordinated debt and servicing portfolio

• Leverage: Total liabilities divided by Adjusted Net Worth

• Liquidity or Current Ratio: Current Assets divided by Current Liabilities

Page 20: Surviving Changing Markets Mission Impossible?. Mission Impossible

Keys to Avoiding Covenant Violations• Use your projections to cut costs before

you incur losses• Use your breakeven analysis to plan your

overall approach—adding new products, moving into new geographic areas, etc.

• Use off-balance sheet financing to avoid leverage and current ratio problems

Page 21: Surviving Changing Markets Mission Impossible?. Mission Impossible

Summary

• This is a cyclical business-plan early and often!• Pre-sell all loans prior to funding to avoid

guideline shifts• Vigorously defend against existing and future

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

your financial statements, it’s too late!• Manage your capital and leverage to avoid

covenant violations• Look into off-balance sheet financing to provide

flexibility• Keep your capital intact and get to Mission

accomplished!