Cash Management Strategies During Periods of Tight Liquidity

Good cash management is a key component to any company’s success. But when liquidity starts to tighten, the focus on having adequate liquidity becomes more acute.

The past few years have been very challenging for the mortgage industry. The good news is that many companies started this downturn with excess liquidity in their bank accounts or had large servicing portfolios that could be liquidated as needed. This excess liquidity enabled them to continue to operate during unprofitable periods. It also enhanced creditors’ confidence in their borrower’s ability to repay outstanding balances. Creditors hate surprises. So, you should be using forecasts (see more on this below) to plan out how you can avoid a liquidity crisis and, if necessary, communicate with your creditors and other stakeholders well in advance.

If your forecast indicates that your cash levels could put you at risk of non-compliance or not meeting your operational needs, you will need to start forecasting daily while looking for actions to help prevent it. Hopefully you have already reviewed your expense levels and made the cuts necessary to get back to profitability, but at this point, you probably need to go even deeper.

Here are some other options to consider:

• Review your stale or repurchased loans that you have been holding for a better price in the future. Liquidate them now.
• If you still have some servicing, sell it.
• Consider committing loans to investors with the fastest turn-times even if it means compromising on price.
• Negotiate with vendors to minimize your prepaids, pay as you go.
• Slow down your AP department. Pay your bills as due not based on when you receive the invoice.

Forecasting your liquidity enables you to take necessary action sooner, provide advanced notification to your stakeholders, and, hopefully, demonstrate how you intended to cure your liquidity issues.

Forecast Types

1. Forecast at least six months into the future. This forecast will focus on month-end balances over the next six months (longer is better). To reasonably forecast month-end cash balances you need to estimate your expectations for net income, and other larger balance sheet accounts (primarily loans held for sale, warehouse outstandings, mortgage servicing rights, the fair value of your interest rate locks, and hedging instruments). You will also need to account for any expected shareholder distributions or contributions.
2. If your forecast indicates that your cash levels could put you at risk of non-compliance or are not meeting your operational needs, you will need to start forecasting your cash balances daily. This type of forecast will cover your expected daily uses and sources of cash for at least the next four weeks. Each day you need to determine the prior day’s actual balance. You should also determine the variance of your prior day forecast to its actual balance to identify opportunities to enhance the precision of your forecast model. Here are some of the components that you will need to incorporate into your daily cash forecast.

• Daily uses of cash included, but are not limited to:
  
  • Haircut on fundings, net of discount points and other closing items.
  • Invoice payments
  • Payroll
  • Hedge pair offs
  • Hedge margin calls
• Daily sources of cash included, but not limited to:
  
  • Proceeds from the sale of loans
  • Hedge pair offs
  • Release of margin calls

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About CWDL

At CWDL, we are industry specialists with expert perspectives on mortgage banking. We give you industry-specific audit, accounting, and tax solutions that help you better understand the present so you can plan for the future. Our forward-thinking insights have the power to transform the way you operate. The training and education we provide empower your team to do more. Even amidst volatile markets and seismic industry shifts, we’re here with the guidance you need to see beyond today and make confident decisions about tomorrow. At CWDL, we help you see what’s possible.

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