“If you can’t measure it, you can’t manage it.” 

Peter Drucker 

One of the studies we perform for mortgage bankers is a review of the capital markets area.  We review various policies and procedures, controls, hedging strategies, reporting and performance measurement tools.  We also see if there is board oversight and validate if management is adhering to the risk policies approved by the board. 

A key deficiency we see in many shops is the lack of reporting and measurement of secondary market activities.  One key measurement is the difference between the expected gain-on-sale and actual gain-on-sale.  Let’s dig into what this means and why it is important.

 The life cycle of the secondary market transaction begins with the Capital Markets group establishing its secondary margin and adding it to the investor rebate to generate the price deployed to loan officers.  Loan officers quote a price to a borrower that has the secondary market margin included in the price.  When that lock request is received by the secondary market desk, the expected gain-on-sale is generally recorded in the loan origination system.  If the loan closes within the commitment period, is priced correctly, and closes with little or no investor conditions, the gain-on-sale realized at loan purchase should be the same as when the lock was issued.

Now let’s fast forward 30-40 days when an investor purchases the loan.  The Company receives the loan purchase advice (PA) and records the PA information into the LOS.  Many times, no one does a comparison between the expected gain and actual gain.  In some cases the actual gain is less than what was expected.  Now why would this be important?

1. First investors do make mistakes and it generally,  not in your favor

2. Late deliveries and poor packaging results investor extension fees.  Tracking investor extension fees and the reason why you incurred the additional cost is important.

3. Pricing errors can result in reduced margin.

4. Processing inefficiencies can result in loan extensions and additional fees.  This problem specifically is the cause of large revenue leakage in secondary market.

As Peter Drucker quote says, without measuring your results, you really can’t effectively manage your business.  Secondary market revenues are a large part of top line revenues and good managers will ensure that they actually generate what they expect.  Monitoring this key metric will help reduce revenue leakage and increase profits.