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More than a Midas touch.

Mortgage company CFOs need more than just a way with numbers and a talent for making money. Today's chief financial officers must go beyond mastering the best source of funding and bring a deep knowledge of operations, technology and strategic planning to their jobs.

DURING THE 1987 REFINANCE BOOM, lenders found it easy to expand their operations as rates fell and profits poured in to pay for expansion. But some companies were unaware of the financial risks involved with adding new production overhead, and they ultimately went out of business as a result.

Today, most mortgage companies recognize that production is just one of numerous disciplines that need to be stressed for a lending firm to be successful.

Edward J. Sauer, executive vice president and chief financial officer (CFO) at Princeton Financial Corporation in Orlando, says lenders "are not totally production driven as they were in the past." For that reason, CFOs today "have more input in decisions such as new branches, expanding wholesale, and loan pricing."

CFOs are glad to be taking a more active role in running companies. "I wanted to be on the front-end of the business making decisions, not auditing after the fact," says Davee L. Olson, explaining why he left the Touche Ross accounting firm in 1987. Today, Olson is executive vice president and CFO at Residential Funding Corporation in Minneapolis.

"After two years here, I was more involved in running the business, and a lot less involved in accounting than I thought I'd be," says Ronald G. Booth, CFO of Carl I. Brown and Company in Kansas City. Out of 800 total employees, about 125 report to Booth.

Bruce Schnelwar, CFO and senior vice president of Margaretten Financial Corporation in Perth Amboy, New Jersey, adds that he's consulted on all large expenditures--"from space to servicing."

Riding the wave

Soliciting input from CFOs couldn't have happened at a better time for the mortgage industry. Companies today are attempting to maximize their ride on the refi wave, but they want to avoid wiping out when it dissipates near the shore.

Republic Bancorp Mortgage Inc. in Farmington Hills, Michigan, (a wholly owned subsidiary of Republic Bancorp Inc.) will increase its production from $490 million in 1991 to an estimated $3 billion this year. CFO Larry Rosenberg was hired about a year ago because Republic's managers wanted to know more about where their expenses and profits were coming from. Rosenberg is analyzing how volume and profits would be affected if loan pricing to mortgage brokers was made more aggressive.

James R. Reis, president and CFO of Express America Holding Corporation and vice chairman of Express America Mortgage Corporation, Scottsdale, Arizona, notes that "the death of the thrifts" opened up opportunities for mortgage bankers. But fluctuating interest rates, fraud and thinner margins call for lenders to have other abilities besides salesmanship.

Kevin D. Race, executive vice president, CFO and treasurer of Fleet Mortgage Group, Inc., Columbia, South Carolina, notes that "mortgage firms have become a lot more sophisticated financial service companies than they've ever been. Today they have their own credit ratings and stock." For that reason, "the financial side has gotten a lot more focused," he adds.

"The complexities relate to how we amortize our servicing rights and whether or not we're hedging PMSR," says David Stephens, executive vice president at Lomas Mortgage USA in Dallas. "We were dealing with very few of those issues five years ago."

Roy Browning, senior vice president and CFO at Metmor Financial Inc. in Overland Park, Kansas, notes that "in the past, we saw servicing as an annuity, not as an asset to be managed." Today he heads up Metmor's portfolio strategies committee, which attempts to see "where the risks lie, and how to position ourselves to protect value."

CFOs are helping to remake companies. Vacys Garbonkus, executive vice president and CFO at Republic Realty Mortgage Corporation--a commercial mortgage banker in Chicago--is working "to start new business lines that make sense to us without expanding overhead." He is doing that in order to "squeeze more productivity out of existing staff."

One way to gain a competitive advantage now is by becoming more efficient operationally. "Technology and capital are kings," says James Gross, senior vice president and CFO at J.I. Kislak Mortgage Corporation in Miami Lakes, Florida.

CFOs find their jobs changing as new demands emerge. Judith Berry, executive vice president and CFO at American Residential Mortgage Corporation in La Jolla, California, says, "I spend my time differently now than when before we went public," noting that much of her efforts now go into "trying to educate the financial community about mortgage companies."

In the trenches

Says Garrett Varner, vice president and CFO at Precedent Financial Corporation in Indianapolis: "Quality resources are available, but the industry is changing very rapidly... our company is not tied to how things have traditionally been done, but focuses on initiating change rather than responding to it. In that context, you learn by doing, by getting in the trenches with your associates and developing your own strategies."

Varner had to learn about quality control, loan administration and post-closing audit in order to accomplish all that's been asked of him. Precedent Financial expects to fund $400 million this year, and Varner's oversight ranges from financial accounting to personnel, from information systems to loan administration, and from loan delivery to quality control.

CFOs are not just setting up internal controls, adding technology and deciding about expansion. Many also are finding themselves working with both managers and staff throughout their companies as they put new plans into place.

Anthony Buczkowski, CFO and executive vice president of operations at Lumbermens Mortgage Corporation in Mountainside, New Jersey, discovered "no automation" when he came to Lumbermens about eight years ago. "We did everything by hand," he says. "Now we're totally automated." Buczkowski challenged the staff to computerize processing and "let them make mistakes" and then learn from them. Lumbermens is considered so sophisticated in terms of its automation now, he says, that some software companies use it to test new programs.

"When you change systems, you must make people comfortable," Buczkowski explains. "It takes time." He helped by providing training, programming support and technicians ready to fix hardware problems in Lumbermens' five branches. "It's a people approach," he says. "If everyone is trained and happy, they don't question new systems."

CFO backgrounds

Chief financial officers are found at firms ranging from the largest in the business to those with annual production of well under $500 million. Most mortgage company CFOs have come from a national accounting firm. However, some have backgrounds in the securities industry or with financial institutions.

Once on board at a mortgage firm, they typically are given financial management responsibilities such as accounting, financial reporting and treasury--or investing cash flows from servicing and originations.

Budgeting for future needs and business planning become important aspects of their work. In addition, CFOs often are given responsibility for corporate divisions such as MIS (management information systems), quality control, human resources and support functions--even down to overseeing the mailroom and receptionist.

Following are highlights of conversations with a dozen mortgage lending CFOs.

Davee Olson, EVP/CFO, Residential Funding Corporation, Minneapolis--"CFOs are going to become more critical to a lender's success as business gets more competitive," Olson says. "Firms need more forecasting and strategies. They must be able to react in a timely fashion as rates change and make tough decisions."

Olson's responsibilities include managing eligibility standards for correspondents selling into the RFC conduit, making decisions about which loans the conduit should ask its sellers to repurchase and overseeing quality control. He also is in charge of master servicing and manages the master servicing of $1 billion a month in mortgage-backed securities.

Automation helps by "integrating the front end to the back as correspondents make commitments to sell. You know how much cash is needed," says Olson. Funding sources then must be found that match the assets for 30 to 60 days, until they are securitized.

He also oversees interactive planning sessions--lasting two to three days--in which managers make budgets based on assumptions provided by the executive committee.

Olson would like to gain more fee income and "diversify the revenue stream, so that it's not so cyclical." He looks to increase fees by doing REMIC tax reporting on MBS, as well as from contract services such as underwriting and file reviews.

Judith Berry, EVP/CFO, American Residential Mortgage Corporation, La Jolla, California--Working at a firm with a "fairly aggressive growth strategy" requires that a CFO help in the decision-making process.

"Although we deal with accounting, we don't let accounting drive business decisions," adds Berry. "We work really hard to help the business division heads--it's interactive."

One way she assists managers is with "very extensive performance measurements at the branch level. We allocate all revenues and expenses to a business line."

Berry encourages "peer analysis"--letting branch managers compare their volumes and profits with other American Residential offices. She also suggests finding benchmarks from outside the company. "We need to see if we are growing as much as the competition is," she says. "Benchmarking and peer analysis are really critical."

Berry must provide "very timely and very accurate information" to management in order to "spot trends regarding costs and margins and show accountability."

David Stephens, EVP, Lomas Mortgage USA, Dallas--Helping to make pricing decisions on flow and bulk purchasing acquisitions and then planning the cash flow to support those purchases are some of Stephens' primary tasks.

Twice monthly his staff projects production by month for the next year in order to estimate future cash flow needs.

"We project cash flow in two-week increments," Stephens says, "because needs at the first and end of the month are less than in the middle."

Stephens adds that "we put a lot of emphasis on budget." Managers of major cost centers meet at the middle of each month to see how their expenses compare with budgets. Another meeting is held at the end of the month to compare actual figures with budgets.

If runoff is faster than expected, Stephens might suggest moving up an acquisition. He also advises departments on how to tie their incentive compensation plans into corporate goals. In addition, Stephens does "ongoing evaluation of new lines of business."

Last year, he helped Lomas grow its warehouse lines from $250 million to $800 million, in order to take advantage of spreads of 3 percent to 4 percent.

Larry Rosenberg, CFO, Republic Bancorp Mortgage Inc., Farmington Hills, Michigan--Republic's rapid growth prompted senior managers to find out more about production costs and branch profitability, says Rosenberg. Expansion had occurred with an emphasis on break-even points. "We are now determining ways of maximizing profits," he notes.

But he was hired to discover "what are the critical volumes needed to stay profitable with each branch?" He also wanted to find the critical links between pricing and profitability.

By knowing the average income per loan, Rosenberg can see how much additional volume would be needed to maintain profits if Republic were to price more aggressively.

After setting up back-shop controls and getting good accounting information from each branch, Rosenberg is "helping to plan the future" at Republic.

"Production people know how to expand," he explains, but they are asking, "What's best for the company as a whole?"

Retained earnings and the sale of roughly one-third of the servicing rights from each year's production volume provides the capital for growth, he adds. "It's not high-overhead expansion. We need only add one commissioned sales rep, with an existing "book of business," to increase correspondent lending volume."

Kevin Race, EVP/CFO, Fleet Mortgage Group--Kevin Race came to Fleet Mortgage Group in 1991 to help with its initial public offering. Selling stock provides "capital to compete with companies who have deep pockets," Race explains. "You have low-cost funding when you can issue your own paper, and you have the capacity to grow" when there is capital.

Providing funding for the balance sheet is one of his challenges. "The balance sheet is like an accordion as it rises and falls," Race says. "It's not a static balance sheet like in a bank--it turns over every 30 to 45 days."

Race works to match assets and liabilities on the balance sheet both by rate and maturity.

But he also pays attention to operational details. For instance, Fleet has begun using cashiers checks to disburse funds rather than wiring money, because doing so improves their float. Race also changed the lock box structure at Fleet.

He predicts that funding and treasury functions will become fully automated into the production process. "You will be able to create a funding structure for each loan" soon after application, Race adds. This would mean that as the process becomes totally automated, secondary market execution could be planned when a loan is originated.

Ronald Booth, CFO, Carl I. Brown and Company, Kansas City--At a privately held company, "you do the business you can, based on your capital," says Booth. "We could produce more loans if we had more warehouse credit," he adds.

"But we don't have to sell servicing to book quarterly profits. We can manage the company on a long-term basis."

Booth's current activities include increasing warehouse lines by adding five more banks, "leading the charge to get us automated," putting in payroll cost-increase controls and doing cost analysis by branch.

Carl I. Brown is automating originations and servicing, as well as branch communications. Automation's main benefit to customers is faster processing, Booth adds.

About three years ago, Booth set up a prefunding fraud-detection program. He has 30 "fraud auditors" call borrowers, appraisers and employers on every loan before funding. "It's a chance to make a difference," Booth says.

He foresees Wall Street firms getting more into warehouse lending. "We will see a lot of new financing tools in the next two to three years," notes Booth.

"Cost containment is the key when rates go up," he adds. Carl I. Brown has been using temporary workers and overtime, which can be discontinued when volume recedes and they are no longer needed. In addition, he would like to help poor-performing loan officers find jobs somewhere else.

Bruce Schnelwar, CFO, Margaretten Financial Corporation, Perth Amboy, New Jersey--Forecasting cash flow "is difficult," says Schnelwar. "But you have to do it."

Every day his department updates cash flow projections for the next 30, 45 and 60 days. Closings are forecast based on the firm's pipeline, and cash flow then is estimated from that information.

Flexible financing arrangements are needed to handle mortgage totals that can vary widely, Schnelwar adds. Margaretten's fundings range from $500 million to $1.5 billion per month.

Different instruments are used to fund loans at the lowest possible cost: bank borrowings, warehouse lines, commercial paper backed by a letter of credit, plus repos and early sale programs from Wall Street firms and the agencies.

Keeping credit ratings strong helps to keep down the cost of borrowing, Schnelwar adds. He also focuses on watching budgets in order to help the bottom line.

Because Margaretten is publicly traded, Schnelwar participates in the quarterly presentation of financial information. After press releases are sent out, a conference call is made to members of the financial press and stock analysts who follow Margaretten. Individual follow-up calls then handle remaining questions.

Schnelwar predicts relationships with investment banks becoming more important in the future, as Margaretten goes to the capital markets more frequently.

Jim Gross, J.I. Kislak Inc. Mortgage Corporation, Miami Lakes, Florida--"Efficiency gives a competitive edge in a high-volume/low-margin business." Gross adds that both process and technological efficiencies are needed.

Gross serves on Kislak's policy committee, which considers different aspects of the company. "Persons outside of a division often can see the need for change," he says.

Getting others to go along with an operational improvement usually isn't hard, says Gross. "All of us are focused on the bottom line."

Because mortgage banking "is the only growing industry within financial services," he expects that it will attract good talent in the future. "This is a very, very dynamic industry," Gross notes.

For the last 18 months, his main focus has been adding warehouse credit to handle the volume increases. Gross sees a trend toward firms other than banks offering services such as lock box and warehouse lending. Wall Street companies are developing gestation products that "start the financing with the funding of the loan," he says.

Gross adds that he improves Kislak's profitability through cost-control efforts, technology and reengineering initiatives, by keeping banking costs low and by making sure that capital and the quality of earnings are sufficient to keep bankers satisfied.

Jim Reis, President/CFO, First Western, Scottsdale, Arizona--Purchasing a mortgage company from the RTC--and then selling stock and running it as a publicly traded firm amounts to "a huge change," says Reis. Now his business "is driven more by earnings and accounting than before," he explains.

Reis adds that "shareholders don't understand why you can't retain what you originate. But you have to sell it--and then buy back servicing which you don't like as well as what you just sold."

Warehouse lines have increased from $30 million to $350 million for First Western, which is a wholesale lender. Term financing is used, in which the funds are secured by the servicing rights.

First Western had a $2 billion servicing portfolio when it was acquired in May 1991. Reis expects to reach the $6 billion mark by the end of this year.

He notes that "you need capital for growing your originations system and servicing portfolio." First Western has raised $50 million in two public offerings and plans to acquire other wholesale lenders.

Meeting with mortgage broker customers is important to Reis, who says, "whenever there are 20 or more in a room, we'll be there." He wants to work with brokers who are originating mainly purchase business now, in order to avoid a slowdown when refis diminish.

Vacys Garbonkus, EVP/CFO, Republic Realty Mortgage Corporation, Chicago--Republic Realty "is in an acquisition mode," says Garbonkus. The commercial mortgage banking firm services a $5.7 billion portfolio and is buying smaller companies that "may be top heavy, and not cost effective," he explains.

Garbonkus has monthly phone meetings with the firm's 14 branch managers to go over their production. "You have to be aware of every piece of the organization," he says.

Half of Republic's fee income comes in during the last quarter of the year, so it's important to monitor expenses and revenue to make sure they will match. "A key today is knowing who is originating costs, where the cash flow is and how strong it is," Garbonkus says.

Although Republic represents life insurance companies, Garbonkus is planning to seek money from pension funds and also pursue securitization.

In addition, Garbonkus is reorganizing the servicing department in order to provide investors with more information. "Life companies themselves are under pressure," he notes. "Some are bringing the servicing back in-house."

Garbonkus will be giving these investors a more-complete picture of how a building is operating, rather than simply remitting cash as agreed upon. Investors today "want to look at all aspects of a property," he says.

Roy Browning, Senior Vice President/CFO, Metmor Financial Inc., Overland Park, Kansas--Browning hired a former banker to more effectively manage the firm's cash--and has been able to bring an additional $1 million or more per year to Metmor's bottom line. A number of small steps, such as lowering reserve requirements on accounts, made this possible.

"I exist to allow other areas of the company to be more efficient," says Browning. "I don't worry about who gets the credit."

Besides analyzing cash flow and use of the lock box for loan administration, he will look at servicing costs, secondary marketing and new products. Negotiating credit agreements are also part of his job.

Browning believes in "getting the bank you work with to provide other services besides loaning money." In addition to almost doubling Metmor's warehouse line, Browning went from a secured line to unsecured credit--without changing the interest rate charged.

Browning makes recommendations to senior management regarding purchases, sales and hedging. "We don't just give financial reports, but are more of a consultant now." Ten years ago, he adds, that would not have been the case.

Before giving advice to the CEO on operations, Browning makes sure that the data used to make decisions is accurate. "The integrity of our analysis and data is more important now, so we look at our own controls more carefully."

Currently he is working on integrating Metmor's front-end, servicing and accounting software systems. Some of his new responsibilities came after Metmor's president observed that Browning was not just a number cruncher, but also a good manager of people.

Ed Sauer, EVP/CFO, Princeton Financial Corporation, Orlando--Being part of a five-year-old firm provides "more of an entrepreneurial spirit," says Sauer. "You can make decisions quickly and implement them, which is helpful in a competitive market." However, rapid growth is difficult with a firm that has limited capital.

"To stay in business in the long run," he says, "you need technology." Princeton's loan officers have laptop computers, and the firm uses artificial intelligence software for underwriting. Eventually, 60 percent to 70 percent of all loans are expected to be approved through this automated system.

Meetings are held "at least weekly" to discuss pricing and look at production numbers. Sauer might be asked "to explain the servicing value of different products" to managers at that time.

Tighter margins and tougher competition calls for identifying problems and managing operations more efficiently, he adds. Establishing "Princeton Academy" has allowed the firm to hire new employees without industry experience.

"Capital costs and products are generally the same for everyone," Sauer adds. "People are your competitive edge." He notes that many workers never get formally trained--such as the receptionist who moves up to being a processor, then an underwriter. But after one series of classes, Princeton's newest underwriters now yield as much output as the most experienced ones do, according to Sauer.

Today, mortgage CEOs need to have a financial background to deal with issues ranging from secondary marketing to selling shares to the public. Many heads of mortgage companies thus count on their CFOs for guidance in a growing number of business areas. CFOs will continue to become even more crucial to the management of many mortgage operations as the business itself becomes increasingly complex. And it would not be surprising to see more former CFOs starting to join the ranks of CEOs in the not-too-distant future.

Howard Schneider is a freelance writer based in Ojai, California.
COPYRIGHT 1993 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Cover Report: State of the Industry; mortgage company chief financial officers
Author:Schneider, Howard
Publication:Mortgage Banking
Date:Oct 1, 1993
Previous Article:After the party.
Next Article:Old world grace; new world vision.

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