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Journal: Blog2
  • Dr. Andy Schell, Ph.D., DBA, CPA, CMB

Zombie Mortgage – Dead Man Walking

A warning to Mortgage Company Branch Managers...

Zombie mortgage company has a liquidity crisis limiting the funding of new loans because the warehouse line lender reduced or cut funding, but the branches don't know about it yet...

A mortgage company that runs out of money because of ongoing losses might create delayed loan funding or lose the ability to fund loans because there’s no money.

This is the Zombie bite, also known as a liquidity crisis.

A mortgage company with a liquidity crisis typically will delay funding and could miss a payroll. Once the branches learn that warehouse funding got cut or pulled, the vortex of death begins as the branches leave because of the weakness from insufficient cash.

But where can a branch go that is safe? This is the critical question.

Mortgage companies are not banks with customer checking accounts and a big vault filled with currency. Mortgage companies must get money to fund loans from an FDIC commercial bank through a credit facility known as a warehouse line of credit. Federal and state regulators examine FDIC banks. And unlike at SVB, warehouse lender banks must follow strict lending and risk management rules. These rules limit the amount of a funding line they are allowed to offer to a mortgage company to fund loans.

This funding limit is based on the mortgage company's net worth and bank account balances. A mortgage lender with a $100 million warehouse line usually must have $6.6 million in net worth and $5.3 million in deposits at banks. The math is based on 15X leverage and 80% liquidity.

If cash drops from $5.3 to $3.0 million, the warehouse line will drop to around $56 million down from $100 million. Is this lower borrowing limit enough to fund all loans? This is the question all branch managers should ask.

All FHA-approved mortgage lenders must submit a CPA audit to HUD each year, usually by March 31st. This audit must also be delivered to the FDIC bank warehouse lenders. The CPA audit will show how much net worth and cash is left.

When the FDIC warehouse banks get the financials that shows low cash, they are forced to act and cut or terminate the warehouse line. The financials are released monthly and quarterly.

There are a lot of mortgage companies promising branches big money to come over. But the company could already be The Walking Dead. Originators should consider funding failure risk when considering offers. Ideally, verify cash before moving.

Beware of the Walking Dead. Get a copy of the CPA audit or the bank statement to know for sure.

PS… Calculating the liquidity limit can be complicated.

PPS… The actual liquidity requirement is presented in different ways.

PPPS... Ask your CFO to show you the liquidity requirement.

What to help improve branch financial reporting?

Join Dr. Schell's Research Study - Click HERE

MBS Financial Services supports the following areas:

  • Growth Strategy – We can help you plan and execute a growth strategy.

  • Hedging & Pipeline Risk Management - Dr. Schell can help explain how hedging functions, the benefits of hedging, and the risks associated with the activity. See blog posts.

  • Technology must align with a firm's strategic objective. Every mortgage lender's technology infrastructure significantly impacts its customer experience and employee workflow. MBS will help select, configure, and deploy the best technology solution.

  • Executive Development - Leadership is a learned skill. Dr. Schell can teach you to be an amazing leader, an effective manager, and an inspiring coach that can foster a vibrant culture.

  • Accounting Services – Dr. Schell, CPA, leads the accounting services team to become your outsourced accounting department. This alternative makes more and more sense for companies wishing to focus on their core business and also want trustworthy accounting and financial reporting support.

About Dr. Schell:

Dr. Andy Schell, Ph.D., DBA, MSML, MBA, CPA/CFF, CMB

Dr. Schell is CEO, Managing Partner, and Co-Founder of Mortgage Banking Solutions and the Founder of MBS Financial Services ("MBS"), based in Austin, Texas. Dr. Schell is known for his ability to turn "vision into reality" and "chaos into order" as he finds creative solutions to the challenges his clients face addressing Revenue Stability, Technology Enhancement, Financial Management, and Workflow Efficiency.

He has 4 decades of experience as a strategist directing the activity of both small and large groups of employees, including mortgage lending activity at Bank of America. His leadership knowledge extends from his hands-on experience and his academic training in his MBA, his master's degree in leadership, and his doctoral work to examine employee dynamics given leader stimulus.

To find out more information about MBS' services, please click HERE

To contact Dr. Schell, click HERE

Find more information at ; (512) 501-2812;

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