They will continue their discussion on why banks see this as a real advantage and also how it’s just a really great symbiotic relationship.
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SPECIAL EPISODE: Treasury And Cash Management For Mortgage Banks With Russ Anderson and Jack Nunnery
We’re back with part two talking about treasury and cash management with Russ Anderson and back on the microphone with me is the famous Jack Nunnery. It’s good to have you back on here, Russ. I’m looking forward to continuing our discussion that we started on the show. We have gotten a lot of responses. It’s not surprising. They’re mostly CFOs that are responding and they’re going, “This was a great talk. I can’t wait for the rest of it.” Let’s get it going. Jack, if you could start us off by explaining why banks see this as a real advantage and also how it’s a great symbiotic relationship?
First of all, David, I’m not surprised that the audience that is most interested in this are the CFOs. It’s important that you look at your treasury management function at an independent mortgage banker as a potential source of revenue. If you’re not making money off of your treasury management, you’re leaving money on the table. Russ, it’s great to talk to you again. Last time, we focused a lot on the mechanics of independent mortgage bankers and cash management.
In this episode, I want to talk a little bit about larger IMBs, but before we get there, let’s talk about why this is important to banks. Banks earn money from basically two different sources, interest income and fee income. At least it’s my perception, Russ, that fee income is a very important component from a bank stock analyst’s view of the performance of a commercial or a consumer bank. What do you think about that, Russ?
There is no doubt. Fee income is critical to a bank. They are looking for all different ways to generate fee income. Everything from investment banking to treasury management and equipment leasing. There are a number of things that they use to gin up some fee income, but the treasury is one of the biggest contributors because banking requires transactions. Lots of transactions are good for a bank. When you look at the mortgage industry, there are a lot of transactions between wires, and ACHs, and all the money’s in and money’s out. They love that from the independent mortgage banks where there are lots and lots of transactions and that all generate fee revenue.Treasury is one of the biggest contributors to fee income. Banking requires transactions, and that's good for the bank. Click To Tweet
Is it fair to say that stock analysts view fee income as more stable and recurring as compared to interest income?
Yes because fee income continues no matter what. When the economy goes down, loans aren’t being made. Right now, most of the loans are being made in the real estate industry and that’s why it’s so important right now. Most of the commercial industrial stuff isn’t getting a lot of lending right now, so that’s cyclical. Everybody knows the mortgage business is cyclical too but when you have any kind of downstroke on those things, you’re going to see less interest income. That fee income is always there because there are always transactions.
In the last episode, you talked about mortgage banks need to view their banking relationship holistically. My question is, “What is the single biggest mistake that larger IMBs make in handling the deposit side of a banking relationship as a silo?
What happens is if you treat any element of what you’re doing with your bank as a silo, you’re making a mistake. You’re commoditizing your banking relationship. When you commoditize your banking relationship and treat each different element and try to get the lowest cost for everyone, then you’ve just commoditized the whole financial services products that you’ve purchased.
What’s always shocking to me is our customers will do something like that and commoditize their financial services, and then they’re shocked when something goes wrong in their business and the bank treats something like a commodity. That’s why financial relationships are more important than trying to divvy it all up and get the best price possible.
Larger IMBs should be looking at their deposits. For example, PIT accounts, MSR, advanced financing, and warehouse relationship, all as a single financial services item. Should they lever each other to a fine benefit?
Absolutely. Some of the best clients that I’ve had got the full picture in mind when they would come to the bank. They would look at everything that they were doing from soup to nuts. They’d see their warehouse financing, MSR financing, advanced lines, and deposits, including their P&I and T&I accounts as a single line item. What they would end up doing is negotiating prices across the board. One may be higher than they would’ve liked to have seen, but the other may be lower than what they expected.
In the end, what they do is they price the entire relationship so that everybody is happy. They’re getting the returns where they need to get the returns and they’re taking the hits where it’s most comfortable to take the hits, but across the spectrum, they’re getting exactly what they want. When you start divvying it up, you end up making everybody unhappy. You need to try to look at it as a single product within your financial services with that bank.
I’d like to focus for a moment on the P&I and the T&I custodial accounts. Do you think that banks are familiar with seller servicer guidelines around what’s allowable and not allowable with regard to P&I and T&I custodial accounts?
No, they aren’t. That’s one of the things I oftentimes caution independent mortgage banks on. It’s that it’s not the bank’s seller servicer ticket that’s on the line when they’re playing fast and loose with those P&I and T&I accounts. Banks will do what you tell them to do in terms of paying interest or using them however you want to. The seller servicer guidelines are what independent mortgage banks need to scour to understand what they can and cannot do with these deposits.
Banks aren’t going to do it. They don’t care. Most of them are happy to have the deposits and they’ll do what you ask them to do with them. You’ve got to get into the Fannie, Freddie, and Ginnie seller servicer guidelines and know exactly what they say, what you’re allowed to do, and what you’re not allowed to do.
Do banks care about what the seller servicer guidelines outline for appropriate compensation for P&I and T&I accounts?
Not really. It’s not their ticket on the line. The IMBs have got to decide how far they’re willing to push the envelope when it comes to that, not the banks. Unless the banker is unusually familiar with the mortgage market, which is rare, they’re not going to give you very good guidance. You’re going to have to go on your own. I’ve spent a lot of time pouring through those things as a banker so that I could provide adequate advice to our clients on what they should and shouldn’t do, and what they could and couldn’t do. That wasn’t a very widespread practice in the banking industry. That’s part of what made our offering so good is that it covered the industry from the industry’s perspective.
Not wanting to get deep into the seller servicer guidelines, but are there differences between regulations around GSE versus Ginnie Mae and then P&I versus T&I?
Absolutely. The Ginnie guidelines are pretty straightforward. They say, “Non-interest bearing accounts.” Fannie and Freddie allow for the P&I accounts to earn interest that the IMBs can keep. The T&I however are subject to the laws of each individual state that the servicing occurs in. For example, California requires a 2% return on T&I accounts for its residents.
I think there are twelve other states besides California that have specific guidelines. The scary part is there are a lot of states that are silent on the subject, which means they have yet to speak on it. You have to be careful with that. Normally, the interest requirements that these states have put in place are pre-programmed into sub-servicing platforms or servicing software so that it will take care of it for most of them, but banks don’t know any of that.
Can you talk about some of the things that you’ve seen in the marketplace that were pushing the envelope on the seller servicer guidelines around these custodial accounts? I think our audience would find that to be interesting to try to determine where that bright line is.
I’ve seen tons of it, particularly in the Ginnie world, where people will push the envelope too far in trying to get returns for the monies that are under their control. Everybody needs to keep in mind that money is not theirs. It’s technically consumer money. When the regulators look at it, they look at it from that perspective. In Gennie’s example, people were getting paid for the deposits and it was blatant. They were plain and simply getting a return on those deposits, and Ginnie found an exception with that.
I’ve seen examples where many states, one in particular, in dire need of revenue will interpret their own rule in strictness of manner. Meaning, if you’ve earned anything on anything, they want it. There are a lot of times when mortgage banks have pushed the envelope a little bit too far and gotten on the radar. You have to understand that everybody is auditing every one of these accounts, not just Ginnie, Fannie, and Freddie. State regulators or auditors are looking at these things.
Everybody is scrutinizing what a mortgage bank is doing. You have to be careful about what you’re doing with those deposits, how you’re handling them, and what the structure is behind how you’re getting any compensation for them as an independent mortgage bank. There are ways to do it that fall within the rules that will not make anybody’s radar, but you have to be a little bit up-to-date on what’s going on currently in the market to avoid the traps.Everybody is scrutinizing what a mortgage bank does. You have to be really careful about what you're doing with your deposits. Click To Tweet
That’s a good point. I want to jump in on that question. I want you to expand on that. My concern is this. It’s not the things that we know that gets us. It’s the things we don’t know. It’s oftentimes those blind spots. In your experience working with so many independent mortgage bankers of all sizes, what’s the number of individuals out there that this could bite based on your conversations in the past?
It ranges. I’ve seen huge companies who have zero concern over what they’re getting for their deposits with the bank. If they get audited, they get audited. If they get fined, they get fined. I’ve also seen huge mortgage banks that are a bunch of nervous Nellies. They don’t want to take a chance, and most of them are pretty circumspect about why. They don’t want to put their ticket at risk. It’s not worth it to them. They make their money on spread on their volume. They don’t make it on the edges with their deposit dollars.
It doesn’t make sense to take that bigger risk for that amount of money when you’re running a mortgage bank. Most smaller banks rely quite heavily on somebody like me who can sit there and tell them exactly what they can and can’t do with those deposits and how they should treat them. There are some instances where people have used ways to get things paid for within their business. It depends on the state, but it’s typically okay to run an invoice back to your bank to pay for it if it has to do with your financial operations.
If you’re sending your bills for the temp agency to the bank to pay, that’s not what they have in mind. Does it cost you to run the software that’s connecting you to the bank? If yes, you can invoice something like that back to the bank and use your deposits to pay for something like that. You have to take a look at each individual thing and see what is acceptable and what is not acceptable.
I did have a conversation once with Ginnie about what they consider to be fair compensation for their deposits. They specifically said a discount on a warehouse line that makes sense or maybe some discounts on MSR facilities that make sense. I said, “How deep a discount?” They said, “What do you mean?” “How about zero on a warehouse account?” They rocked back on their chairs and said, “That’s way too far.”
It’s so important to establish boundaries and get some sense of those. It doesn’t sound like there are real bright lines, but this is where someone like yourself who has the experience that you have could advise and help people become aware of at least some of the boundaries that you’ve experienced in these kinds of conversations.
I’ve seen the pitfalls. I’ve seen where people fall into traps. I know the states that are out there trolling for money and where you need to be careful with those particular states. They’re the obvious suspects. Even still, you have to be careful about how you treat that servicing versus another state servicing, Fannie servicing versus Ginnie servicing. Even some investors have specific guidelines for non-agency loans. You have to scour their guidelines to make sure that you’re staying within their rules too. I’ve spent plenty of time looking over that stuff too.
A little while ago we were talking about the custodial accounts being the consumers, not the mortgage bank. I want to walk that concept down and make sure that our audience understands why those funds are considered to be consumer dollars. Are those funds insured by the FDIC?
They’re fully insured. That’s the thing that you have to keep in mind. I can’t count the number of times I’ve talked to an independent mortgage banker that says, “My deposits, my deposits, my deposits.” They’re not their deposit. They belong to the consumers. Whether it’s P&I or T&I. Frankly, on a P&I account, you can make an argument. Still, that money belongs to that consumer until it is remitted back to the investors. It’s in the hands and the control of the mortgage bank but it’s not their money.
When you look at the FDIC insurance on it, it makes it pretty clear. All of it is covered and it’s covered because the FDIC looks at each dollar, whether it’s principal and interest or taxes and insurance as covered under the consumer’s umbrella. Very few people have a mortgage payment that exceeds $250,000 or taxes and interest that exceed $250,000. All those accounts are covered by the FDIC. If the FDIC sees those as consumer deposits, you can make sure that the other regulators are going to look at it that way too. Some of them are more aggressive than others admittedly but keep it in mind when you’re dealing with these things.
I want to put myself in the shoes of IMB right now. I have a servicing. I use the subservicer for the purpose of servicing those loans. Should I be concerned that my subservicer is adhering to agency and GSE guidelines?
Probably not if the subservicer has complete control over your deposits. The reason why is that subservicers have enormous costs when it comes to straight-up banking. They’re the ones that are doing all the transactions. They need those dollars to offset those fees. They’re not making any interest on that money, which keeps them safe. They are also required to keep all the states up-to-date in terms of the interest owed back to the consumers.
Subservices are pretty good about keeping you out of trouble. Where you get into trouble is when you have control over your own deposits, which I still suggest that when you review your subservicing agreements, you look at those paragraphs. Almost every independent mortgage banker I’ve ever talked to blows right past that part of the subservicing agreement. You need to have some control over those deposits, even if you’re letting your subservicer do it all for you. Even if you’re letting your sub-servicer put it in their bank so that they get the credit for it, you still should have some measure of control over those deposits to move them if it is in your best interest.
That was a great point that you made there about the control of deposits. If you retain control of the deposits, could that cause the subservicer to increase the cost of servicing to you as an independent mortgage banker since there is a financial benefit to the subservicer if they control the deposit? If you take control from them and you reap that financial benefit, does that come back to bite you on the other side because the subservicer is going to increase the cost of servicing?
It could, but that’s the thing you have to figure out when you’re making this decision. I suggest that everybody maintain control even if they grant that control back to the subservicer to use to offset their costs at the bank. If you make the discovery that you can get a better return for your business by maintaining control in a separate entity away from the subservicer, even if your cost for subservicing goes up, you still marginally come out better, and then it’s worth it. My advice would be to keep flexibility. If it makes more sense to reduce your subservicing costs with the deposits now, then do it. Later on down the road, that equation may flip and you may want to use those deposits to benefit the business in a different way.
David, do you have any other questions?
As we wrap up this discussion, Jack, you’ve added some great questions. I love some of your responses. The two of you have worked together. You’re trying to educate our audience as we go back and forth. I love the fact that you have that strong relationship and a previous working relationship. You saw a lot of circumstances. We’ve covered a lot of material here, Russ and Jack, but what have we not covered, Russ, that you think is important that our audience understand or hear?
What’s most important is to reiterate, read the seller servicer guidelines and read your subservicing agreements. Those things have traps in them. That’s the one thing that I did offer up. I don’t think there’s another banker out there who would offer to review your subservicing agreement for you so that you would understand what you were getting yourself into.
A lot of times, people would not realize that there may be a different subservicing agreement within the same subservicer for Nevada versus Iowa. I saw across the board all of them. They would try to push costs for something like a claim of some area of the country that they didn’t charge the same thing in another area of the country. Those things are good to compare and contrast as you’re entering into them, and I don’t think a lot of IMBs do that. You need to consider who your subservicer is going in.
That’s such a good point, Russ. We’ve run out of time. We could keep going on this topic, but the purpose of this is to introduce this topic, get it started, and get you thinking about it. You can reach Russ by emailing [email protected], and you can also get a hold of Jack at [email protected] to learn more. Jack and Russ, thank you so much. This is one of those topics that so many people don’t have knowledge about. You have at least created an episode that we could share with the audience. Thank you for part two of this. If you haven’t listened to part one, go back to that. Jack, I’ll let you wrap it up.
This is such an important area that gets overlooked in the business. We’re all about producing loans, closing, and shipping. This is a profit center. If you develop expertise in it and manage accordingly, you can turn your treasury and liquidity area into a revenue generator for the mortgage bank that you work for.
That’s very important for people to understand. If you want more information, get ahold of Jack and he will connect you with Russ, or get ahold of Russ directly. We look forward to hearing from you. If this is valuable and if there are other topics or you want more depth on this, we’ll get Russ back on the show. You can tell he enjoys this and this is an area of great expertise. Jack, thank you so much for introducing us to Russ. I’m thrilled to have both of you as a part of what we’re doing and helping mortgage bankers across the board. Thank you very much, gentlemen.