2020: Hit for Average, Don’t Swing for the Fence

Written by: Bill Corbet

Managing Director - Strategy

Maximizing revenue through Secondary execution and effective pipeline management will be critical to success in 2020.

From a profitability standpoint, 2019 is ending on a high note. However, MBA is forecasting a modest decline in originations from $2.06 Trillion in 2019 to 1.89 Trillion in 2020; likely enough of a drop to bring back the ‘margin compression’ issues experienced of 2018, as lenders continue the fight to cover continued elevated costs.

Moving forward, hope is not an effective strategy to manage change, nor are wild reactive changes to your business model. 2020 should be about focus on doing each part of your business well, hitting singles, vs. looking for the home run that will solve all the problems at once.

· Pricing Strategy: Price as granular as possible; align to your primary delivery option; and regularly validate that basis risk has not creeped into your pricing model.

· Pipeline data integrity: If you don’t know the size and composition of your pipeline, your Secondary team is speculating not hedging. Missing loans, unidentified fallout and incorrect data can quickly undermine the effectiveness of of a hedging strategy so having mechanisms for ongoing, parallel, validation is critical.

· Delivery options: Mandatory/best efforts, Servicing released/retained, MBS securities/cash offer a wide variety of options that have their own benefits as well as costs that must be evaluated and factored into your best execution model. For example, delivery on a loan by loan basis has the highest cost (could be 25bp) which must be factored into your pricing model. On the positive side, mandatory delivery could result in a substantial (approx. 50bp) pick up over best efforts delivery.

· Leakage: You must measure, starting at the loan level and rolling up to LO, branch, Ops center etc., any and all concessions off your budgeted margins; it is not inconceivable that a “tolerable” level of leakage could reduce profit margins by 50%!

· Delivery execution: To many folks take their eye off the ball once a loan has closed. Subsequently, delivery penalties, or worse, repricing in a rising rate environment, like leakage, is an often overlooked drag on profitability.

Complacency can be fatal and the volume – profitability paradigm – is not symmetrical. Q2 to Q3 volume was up 30% and profit margins were up 10bp. However this does not mean that a 30% drop in volume from Q2’s run-rate would “only” reduce your profit margin by 10 bp, as much as we would like to forget the negative margins of late 2018 were real and now, while times are good is the time to prepare.

As we enter 2020, take a few minutes to work through our list of recommendations highlighted. If your struggling to get started, contact BlackFin Group for our ‘1 Day Secondary Optimization Workshop,’ providing your team a strong start to 2020.