The Importance Of Mortgage Accounting Basics

BLOG VIEW: As most mortgage professionals already know, running a successful mortgage company requires proficiency in accounting. The books and records created at your company are the means by which the rest of the world is measuring your success. As a business owner, you must be able to explain the numbers, know where they came from and know how to stay on a profitable trajectory.

Accrual Versus Cash

If your books are done on an accrual basis, skip down to the next section. If you are not sure, go find out. If you are accounting on a cash basis, I encourage you to move to an accrual basis.

Cash accounting is simply recording transactions when cash changes hands. The day you write the check is the day you record the bill payment. The day you make a deposit is the day you record the revenue. It is easier to account for business this way, but for a mortgage company, it is impossible to match revenues and expenses using this method. To increase your effectiveness, you should consider moving from cash to accrual accounting.

At most mortgage banks, the biggest monthly expenses are commissions that are paid the month after the loans were closed. Revenue for most mortgage banks comes at two key junctures: At funding, where fee revenue and discount points are collected, and when the loan is sold. Revenue from funding and sales can happen in the same month, but in most cases, loans are sold the month after the loan is funded.

When you make the switch to accrual accounting, earnings are likely to be impacted in the first month. If your company earns most of its revenue when a loan funds and you pay loan officers in the following month, then your transition month will show greatly reduced earnings, all other things being equal.

Adding fair market value for your warehouse loans will counteract the extra expenses that are being pushed into the prior month. It would be wise to have a third party such as your accountant or auditor review your financials before publishing them the first month. A trial run for the first month will show the impacts of moving to accrual accounting, and it would be a good idea to prepare your investors and creditors for the change.


How many auditors bring good news? Not many that I have encountered, but they can and should be an important part of the success of your company. A mortgage executive should be on a first name basis with the audit partner at the accounting firm that conducts the audit. An adversarial relationship between your company and your auditors will never benefit anyone. If you don't have a good relationship with your auditor, you need to either make nice or find an auditor with whom you can build a relationship, as soon as possible.

The auditor relationship is important, but a good relationship is not a substitute for expertise, especially in mortgage banking. I recommend that you choose an auditor with at least five other clients who are mortgage bankers. An auditor with other clients in the industry will be better versed in the rules – they will see opportunities for profitability that others will miss, and they are usually a better resource for industry best practices. Add to that audited financial statements that your correspondent investors and warehouse banks trust already and you have a winning auditor.

Accounting Policy And Procedures

You may not be a public company, but you still need to hold yourself responsible for everything that happens inside your business. For public firms, the Sarbanes-Oxley Act of 2002 requires that CEOs and chief financial officers assure that their firm's financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the company.

Although Sarbanes-Oxley was enacted in response to bad actors in some very large companies, it effectively set a standard by which most businesses should abide. When owners consider taking their companies public, one of the first items on the checklist is to become ‘Sarbox’ compliant by documenting policies, procedures and systems for every activity that could have an effect on the financial statements of the company. The obvious first stop is the accounting department.

But let's forget about Sarbox for a moment. Are you confident that your company has the systems, controls and people in place to prevent embezzlement and theft? Is your confidence backed up by documented policies and procedures that are known and followed by you and your employees?

Every executive needs to review accounting policies and procedures annually and adjust them as needed. In addition, every executive needs to follow the rules that were made for the company. If an executive is stepping outside of the rules stated, it gives license through those actions for others to do the same thing or to ignore other rules that are made.

Some rules just make sense for owners. For example, reimbursement for meals and entertainment should be given only to the highest-ranking person from the company at the meal or event. This ensures that managers are not approving their own expenses by passing the bill to one of their employees and then approving the expense report of that same employee. For a mortgage banker, the person drawing the documents for a loan closing should not be the same person ordering or approving the funding wire for that transaction to prevent a lone employee from funneling money out of the company.Â

People Are An Asset

We have all heard it, but the people we have at our companies are assets that do not show up as a line item on the balance sheet. If the people who touch the money cannot be trusted for whatever reason, you need to get rid of them.

If you trust the people, but not their math, that is another problem. In many cases, keeping the people you trust and letting them make mistakes (one at a time and only once � maybe twice) will build relationships that will turn out to be some of the most important you have. Obviously, you want people who will be truthful and forthright in your accounting department. By the end of their time at your company, they will know more about you than most other people because they had access to your finances. They see how you act with money, and that is insight others do not have.

People in the accounting department need to be tight-lipped, rule-following and good corporate citizens who are bondable, even if they are not bonded. They need to have a good understanding of their position and what that position pays because there is a good chance they will figure out how much you and others in the company make and they will compare that to their own check. The person that always needs a raise, especially when others are given raises, is not a good accounting employee.

Unexpected Turns

Surprises come all the time and not all of them are exciting or fun. At the end of the month, when most of the entries are in and you are reviewing the profit and loss (P&L) statement, your eyes go to that bottom line first. If it seems too big, you look to see what expense has not yet been entered, starting with commissions. If there is a loss, you might jump up to revenue and look at the spreads.

If the P&L looks too high or too low, and you hedge loans with mandatory MBS forward commitments, your eye goes straight to whatever accounts are used to book the derivatives. That vein at your temple is beginning to throb. You know this because your right index finger is laying on it and you can literally feel the blood pumping. This number may be correct and positive, in which case you are booking tickets for vacation. The number may be right and red, in which case you may be asking your parents if you can move back into your old room. Whatever the case, you need to sit down with your chief financial officer and your head of secondary marketing and review the hedge analysis including the gain on sale accounting so you can make the proper plans.

Maybe you have never understood why profits go up and down – it's the mortgage business; cyclical is typical. Today is the day you need to get to the bottom of the profit swings at your company. Predictions require understanding the mechanics of the company and the financial implications of actions taken or postponed.

Matt Kiker is managing director for Mortgage Executive Consulting LLC, which serves the mortgage banking community with a full menu of management and accounting offerings including projects, oversight, review, training and interim CFO and controller services. He has been a board member and CFO and has held management positions in capital markets, IT and operations for small and large mortgage bankers.

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