How should lenders utilize their quarterly earnings reports and data to make decisions for their business?
We’ve been taught that knowledge is power and those who know more about the current business situation will always do better. As we have learned more about applying business analytics to our mortgage lending businesses, we have found that this is not always the case.
Not all data is the same. Making decisions based on the wrong information will not lead to a successful outcome.
One case in point that we see often in our industry comes in the form of quarterly earnings reports. Every three months, all of the publicly traded companies in our industry report their performance over the past three months. Last month, we saw the second quarter earnings reports hit the news.
If you’re an investor and you are seeking to uncover trends related to an industry or to the way a company is managed, these quarterly reports offer you a lot of information. But overreacting to a lagging indicator offers you no guarantee that any decision you make will lead to a positive outcome.
I’m not writing about stock prices here as the volatility we’ve been seeing over the past few years can make even the most experienced traders look silly. Trying to predict future stock price movements based on a recent period’s price is a losing proposition.
Rather, I’m writing about what external observers can learn about our industry from these lagging indicators. For instance, Flagstar recently reported lower than anticipated earnings in the second quarter. We saw others slip recently, as well, including HomePoint. Does this mean that the mortgage lending industry is in trouble?
Of course not and no industry executive reading this would jump to that conclusion. The risk I see is when people outside of our industry (homebuyers, real estate agents, investors) look at this information and jump to conclusions.
Lagging indicators are not good for helping us predict what will come next.
Just because quarterly earnings reports are not crystal balls showing us the future doesn’t mean they have nothing to offer.
The most recent batch of earnings releases tells us that profit margins are tighter now than they have been in the past. We expect that because the business mix is shifting and with fewer refinances lenders are seeing higher loan origination expenses, which is always true for purchase money mortgage lending.
Beyond that, we saw a blip in yields for the 10-year Treasury. Pricing rose 46 basis points in May, resulting in a loss of 3.7% on the month. Because virtually all lenders had excess capacity to lend in 2Q2021, instead of raising rates, they sacrificed margin to take in more loan volume. Now that Variant D has brought back COVID fears, we see the 10-year dropping and so we expect earnings to improve next quarter.
Did we need the earnings reports to know that this was happening? Probably not and so the reactions we’re seeing across the industry from these announcements is overreaction.
But we can still look at volatility in bond pricing and clearly see its impact on lender profitability. This should lead smart lenders to be working on increasing efficiency in their back offices. Better technology will reduce costs and that will increase their margin, regardless of what else is happening in the broader market.
By Joe Camerieri, EVP, Client Account Management at Mortgage Cadence
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