Do you know your breakeven point?
Monitoring your balance sheet by performing regular cash flow analysis can help with budgeting and forecasting to ensure that your company has enough liquidity to handle the volume of anticipated business so that you don’t outrun the balance sheet. It is essential to stay prepared and monitor liquidity and net worth requirements so that you don’t find yourself in a situation where you have insufficient liquidity or capital to accommodate the volume of business you experience. It will also ensure that you maintain compliance with regulatory and warehouse covenants.
General cash needs
Forecasting can assist with identifying what your company’s cash needs will be in order to maintain compliance with minimum liquidity requirements with warehouse lines, HUD and other regulators. If volumes of loan originations go up, planning ahead is critical to ensuring that you can finance the haircuts, advances, and LO commissions that go along with it the increased volume.
Mortgage Servicing Rights
Net worth:
Can your net worth handle increased MSRs valuation risk? MSR fair value fluctuations can severely affect your balance sheet and net worth compliance. Volatility of the market and the mark to market adjustments that are required every reporting period can impact net worth compliance.
Liquidity/Cash Flow:
Can you afford to finance MSRs? If you retain servicing of MSRs, it is important to be able to finance the float. If you have an MSR line in place, you need to be prepared in the event you have to pay it back. It is imperative to know ahead of time and be prepared if you will have to invest additional capital or sell MSRs to maintain liquidity in your company. Raise capital whenever possible to ensure that you are prepared.
Do you have enough cash?
If you decide to retain MSRs, it means less cash received from selling the loan since servicing has been retained, which can hurt liquidity. Additionally, some purchasers such as Ginnie Mae require the issuer to fund all loan payments regardless of if you collect from the borrower. The more cash you sacrifice to retaining servicing and pre-funding borrower payments the less cash you have available on your balance sheet endangering compliance with minimum liquidity requirements (and possibly even payroll).
Warehouse lines
Keeping track of your balance sheet by performing regular cash flow analysis can help with budgeting and forecasting to ensure your company has enough warehouse line available for the volume of business you expect. If volumes increase, it is critical to have more than just one line that you are relying on. It is also important to maintain compliance with various covenants that come with warehouse lines, such as liquidity and net worth. Finally, it is essential to monitor your warehouse agreements and covenants, especially when considering a change in your business operations. For example, you should know whether your warehouse line discounts the value of MSRs when calculating the net worth covenant before you decide to retain servicing.
What should you do?
You can make a model of your balance sheet to ease with forecasting and budgeting cash flows and monitor if your company is approaching your breakeven point. Additionally, perform a sensitivity analysis by modeling different outcomes based on various input scenarios of market conditions, and run these reports frequently to stay on top of the needs of your company.
Consider the following
As the market remains uncertain, it is key to know your breakeven point and when you may need to make changes in the company structure, such as bringing on more warehouse lines, investing additional capital, or selling MSRs to maintain net worth and liquidity in your company. Budgeting and forecasting cash flows can help your company know if you are approaching your breakeven point.
At WithumSmith+Brown, we are experts in assessing liquidity and net worth compliance with regulators and warehouse providers and consulting on implementation of best practices. We would be pleased to discuss this with you how other current developments in accounting and financial reporting would affect your business.
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Lauren Grossi, CPA 973.898.9494 [email protected] |
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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals.
