It’s a tough time in the mortgage industry, but those in the finance function can find ways to navigate the headwinds successfully, says Ravi Correa, CFO of Angel Oak Lending in Atlanta.
Correa spoke with StrategicCFO360 about the impact of higher volatility and risk, the importance of good data—and why there are opportunities amid the challenges.
What are the major headwinds impacting the mortgage industry in 2022?
The mortgage industry is going to be presented with heightened volatility and risk this year. Mortgage executives have not been presented with such a plethora of headwinds all at once in quite some time, if ever. The Federal Reserve recently announced a quite hawkish monetary policy stance to combat rising inflation which pushed the 30-year fixed mortgage rate above 5 percent for the first time in over a decade. In addition, according to the Mortgage Bankers Association, refinancing volumes are expected to decrease by roughly $1 trillion in 2022.
Macroeconomic factors are shifting the mortgage industry from what was once to today’s new and volatile normal. Increasing rates combined with fewer homeowners seeking refinances creates the potential of high-level risk for the financials of many originators. In terms of managing financial risk, mortgage executives should focus on interest rates, market expectations and reputation.
How are you navigating risk and volatility in the mortgage industry, especially as both headwinds are becoming more pronounced?
During times of volatility, it’s important to have a solid set of metrics and analysis to guide decision-making. Having a deep understanding of balance-sheet risk and operational risk helps in assessing a business situation comprehensively and quickly developing an effective strategy and, ultimately, eliminating any inefficiencies along the way. Additionally, leveraging data and financial analytics can help drive business transformation and broaden strategy. Ensuring the ability to add a financial perspective to strategic decisions can ensure that they increase enterprise value, especially during these volatile times.
While playing defense with a strong strategy is a critical component, I believe there are also opportunities to grow business during times of volatility. For example, offering non-qualified mortgage loans, which are unaffected by the volume decline in agency origination, is an attractive approach to incorporate to add product depth. Companies with broader offerings are better positioned to handle this adverse environment, while those with limited products will face greater operational constraints.
How are you changing business strategy as a result?
As volume compression results in greater competition and tighter margins, it is my priority to protect the balance sheet and avoid capital erosion. This includes focusing on capital/equity to ensure the foundation is strong, covenants are met and operational flexibility is maintained. Additionally, developing strong financial forecasts using realistic assumptions and producing timely P&L forecasts using active business drivers is key to understanding and effectively managing the profitability levers.
I am also working to ensure that our firm has a strong control framework in place to pinpoint and reduce any inefficiencies as well as lapses in controls due to risk situations. It’s imperative to create well-developed internal controls that shine a light on the root causes of any operational issues and develop a feedback loop that will ensure that loan quality is maintained, and loan-origination operations are efficient and effective.
What performance indicators should mortgage CFOs focus on this year to keep their company profitable and successful?
Amid this challenging environment, mortgage companies should understand their financial health, efficiency and effectiveness. To do so, utilizing key performance indicators can provide CFOs with a holistic view of their business and ensure the company’s success. First off, CFOs should weigh realized revenue against cash realized revenue as well as cash flow generation to better understand liquidity levels. Secondly, CFOs should understand the true cost to originate a loan by understanding the relative cost of each function. Finally, CFOs should understand the operational cycle times to help identify leakage and drive efficiency.
In 2022, it’s more important than ever to run an efficient business and understanding KPIs is one way to ensure operations run smoothly and cost effectively. Businesses that make this a priority can overcome the industry obstacles on the horizon and take advantage as others are impeded by them.