Intro to Mortgage Origination Examinations - June 2022

Internal Use Only

Virtual Introduction to Mortgage Origination Examinations Training Ratio Annualization for Interim-Period Data

It is important to know that the MCR provides quarterly performance information. That is to say that the reporting is not cumulative.

Income and expense information reported as of December 31 does not require annualization since it reflects a full year. The annualization factors are: • March: 4.0 • June: 2.0 • Sept.: 1.3333 For example, let’s calculate Return on Equity for each quarter of the year. The ratio is Net Income/Total Equity. Assume the company’s Total Equity is constant at $54,000,000. Total Equity would normally be obtained from the MCR Financial Condition Balance Sheet schedule for Equity. We shall use the following net income results:

Q1: $1,200,000 Q2: $ 950,000 Q3: $2,000,000 Q4: $1,350,000

Q1 Annualization: $1,200,000 X 4 = $4,800,000

Q2 Annualization: ($1,200,000 + $950,000) X 2 = $2,150,000 x 2 = $4,300,000

Q3 Annualization: ($1,200,000 + $950,000 + $2,000,000) X 1.3333 = $4,150,000 X 1.3333 = $5,533,195

Q4 Annualization: Not needed, just add the quarters together: $1,200,000 + $950,000 + $2,000,000 + 1,350,000 = $5,500,000

Q1 ROE - $4,800,000/$54,000,000 = 8.89% Q2 ROE - $4,300,000/$54,000,000 = 7.96% Q3 ROE - $5,533,195/$54,000,000 = 10.25% Q4 ROE - $5,500,000/$54,000,000 = 10.19%

In the above examples we assumed that the Equity amount remained constant. In reality, this number also changes over time. For any Balance Sheet amounts used in ratio analysis (normally in the denominator), the examiner should obtain the amount for the last 4 quarters and use the computed average.