Today's dramatically changing market conditions require mortgage originators to re-evaluate their existing warehouse lender relationships. Business opportunities are simultaneously emerging, changing, tightening – and in some cases – drying up entirely. Originators need to place themselves in the best possible position to weather these changes and position themselves to thrive in this new market environment.
Beyond having a warehouse lender with financial stability and longevity through multiple business cycles, originators should align with warehouse lenders that support their survival now and their success in the future. Originators must evaluate whether their warehouse lender supports these evolving business patterns by ensuring that they:
- Embrace new technologies necessary for the evolution of e-mortgages,
- Provide flexible pricing methods that match risk and maximize profits,
- Supply quantitative information that improves best execution decisions,
- Integrate with preemptive fraud detection and risk mitigation services, and
- Enhance the relationship through additional value-added services.
Though the list is not exhaustive, by ensuring their warehouse lenders meet these five criteria, the originator will maintain a foundation for long-term viability and success.
Embrace new technologies
When it comes to embracing new technologies, it is important that warehouse lenders facilitate the originator's evolution into e-mortgages. In order to compete effectively going forward, the originator must take advantage of these new business channels.
The benefits that come from e-mortgage adoption – dramatically increasing operational efficiencies, cutting costs and increasing profitability – are substantial. By partnering with a warehouse lender that facilitates their evolution into this new business, the originator can seamlessly integrate e-mortgage components into its existing operations.
The issue from the originator's perspective is one of integration. Seamless integration ensures the ability to originate electronic mortgages alongside traditional mortgages and have both types able to be funded by their warehouse and managed within its warehouse lending software.
The warehouse lender should have the technical ability to import loan smart-doc data and provide the mechanics necessary to transfer and release their control of the loan. Integrated technology provides a seamless process that includes the warehouse in the delivery of the e-mortgage from originator to investor.
By partnering with a future-oriented warehouse, the originator can evolve to e-mortgages at its own pace and make the transition without having to traverse huge operational or implementation barriers. When an organization shifts to a completely new and different method of operation, it is never as simple as throwing a switch. There is always a transitional period during which the organization is still operating under the old methods, while adapting to new methods within the flow of day-to-day operations.
The originator looking to move to e-mortgages should seek a warehouse lender that is able to support both methodologies concurrently.
Provide flexible pricing
To minimize their warehouse carrying cost, originators must be certain their warehouse provides flexible pricing methods that match the inherent risk of the loan. Warehouse lenders should be able through their software to provide the originator with haircuts, interest rates and fee structures specific to the underlying characteristics of the mortgage. While the originator gets the best possible price, the warehouse still adequately covers its own risk on the individual loan while making a reasonable return.
For example, an agency-conforming mortgage will normally have a high credit score on the borrower and a low loan-to-value (LTV). It should therefore not cost the originator as much to warehouse that loan as it would a subprime loan with a low FICO score and a higher LTV.
There's much more risk associated with the latter. Every loan can and should be rated according to inherent risk, therefore, the warehouse should be able to identify and price the loan to the originator based on that risk, rather than lumping all loans into broad pricing categories.
These types of granular pricing methodologies more appropriately reflect the return on the loan and minimize the carrying costs to the originator. Additionally, pricing loans based upon underlying risk characteristics, rather than broad-based pricing, circumvents attempts to penalize loans with less risk in order to compensate for those in the pipeline with higher risk.
The warehouse that embraces future-oriented technologies can more accurately determine risk ratings through integration with third-party pricing services, market-to-market services, valuation services and predictive methods services.
Supply quantitative information
Many smaller originators simply cannot afford advanced secondary marketing pipeline management systems, and the level of actionable data available through a conventional loan origination system is limited. By partnering with the right warehouse, originators can leverage their warehouse's resources to get the data necessary to make better execution decisions by gaining access to an historical database of information to which the originator would not otherwise have.
Smaller, independent originators often use loan origination systems that focus on pre-funding tasks – taking applications and gathering the information necessary to take the loan to closing. Unfortunately, these systems usually provide little or no follow-up data to predict or assess historical profitability for closing and delivery to investors.
For small shops, including those that have more refined loan origination systems, sophisticated pipeline and/or secondary marketing software packages, which perform that kind of quantitative analysis, may be out of their budgetary reach.
Originators that have not yet advanced to the level of being able to afford such software tools can still reap many of the same benefits by choosing the right warehouse lender relationship. The warehouse plays a crucial supplementary role by being in possession of data by virtue of the funding relationship. The originator should seek a warehouse that makes data available to help it improve best execution decisions.
Fraud detection
Mortgage fraud is widespread in today's market and every originator should be utilizing some level of preemptive fraud detection. There is an abundance of third-party providers offering these services today, but the added cost per loan can be an issue for small-to-mid-sized originators. The future-oriented warehouse's lending platform can serve as a portal for these originators, opening up affordable access to third-party services.
The warehouse lender provides purchasing power that allows the originator to access services at a substantially lower cost than it could get on its own. By leveraging its connection to the warehouse as a portal – a single point of entry to these and other third-party services – the originator may avoid the need to establish relationships with each provider individually.
Establishing a relationship with a warehouse that provides this level of portal access to services gives the originator a definite advantage. This structure – and the collective purchasing power of the warehouse on behalf of originator clients – allows for other value-added services to be offered with similar ease and affordability.
Warehouse lenders are continually expanding the scope and reach of services they offer originators. These go beyond the traditional funding of loans and greatly enhance the value of the warehouse relationship for the originator. The warehouse lender's purchasing power can also provide valuable pricing for insurance policies, educational development, analytics, due diligence, operational audits and other professional services.
It's no longer sufficient in today's market for an originator to determine the value of its warehouse lending relationships based on the availability of funding and pricing alone. Rather, the forward-thinking originator should be evaluating the additional services and advanced functionality that a warehouse lender can provide in addition to traditional funding mechanisms.
By carefully examining a warehouse lender's offerings, the originator gains a much clearer picture of the wider, long-term benefits (or lack thereof) the relationship can provide. To make the best decision supporting its long-term viability and growth, the originator should seek a profound understanding of what that relationship brings to the table, aside from the core funding mechanics.
The warehouse's commitment to embrace new technologies and facilitate the evolution into e-mortgages; the availability and flexibility of risk-based pricing; the availability and quality of quantitative information for decision-making; access to third-party fraud detection and risk mitigation services; and the level and variety of value-added services available to the originator through the warehouse relationship should all be taken into account.
With the right warehouse lender relationship, the originator will be able to maintain profitable operations while making the changes necessary to remain viable and thrive in this continually changing marketplace.
Stanley Street is founder and president of Street Resource Group Inc. He can be reached at (877) 577-4462.
