PERSON OF THE WEEK: The warehouse lending segment has been adapting to some major changes during the past year and half – not the least of which is shrinking volume due to the drop-off in mortgage originations. Many warehouse lenders have seen their business more than cut in half in the past year and some have left the space. Yet, warehouse lenders are essential, as they provide liquidity to the mortgage market. Therefore, the ones that remain must right-size their operations in response to market conditions.
To learn more about how warehouse lenders are adapting to the recent downturn, and how they are preparing for the future, MortgageOrb interviewed Rich Berg, senior director of warehouse and custodial technology at SitusAMC, where he oversees the ProMerit Warehouse Lending System.
Q: What is the biggest challenge with warehouse lenders adapting to the cloud?
Berg: For warehouse lenders, adapting to the cloud involves a delicate balance of maintaining continuity in services while leveraging new benefits such as enhanced security, scalability, and efficiency. The goal is to enhance the lender’s operations, not disrupt it.
For most, the biggest challenge is figuring out the technicalities of transitioning to a cloud environment and fully understanding what it means to onboard a given warehouse lender on a cloud-based system compared to an on-premise system. Oftentimes, lenders will have to “unwind” things that they put in place with their on-premise system and then reconfigure or wind them back up to function optimally in the cloud. With the right technology partner, however, this isn’t as hard as it sounds.
Q: How has that strategy worked in practice?
Berg: As far as our own cloud strategy, we’ve had great success so far. In fact, we’re approaching the two-year mark since our first client went live with our cloud-based version of ProMerit in February 2022. Since then, we’ve consistently rolled out monthly deployments and updates, and the results and feedback have been overwhelmingly positive.
Of course, with any large-scale shift in product delivery, there are lessons to be learned and areas we have improved. But for the most part, we’ve had many wins including new feature delivery, improved operational efficiency and overall satisfaction among our clients. By moving to the cloud, they’ve been able to spend less time on manual tasks which has enabled them to move loans off their books faster with less risk, all while reducing their IT infrastructure costs.
Q: How is the process of deploying updates to the warehouse platform for a warehouse lender?
Berg: First, there needs to be rigorous testing to ensure the platform’s functionality and security. Then comes a detailed review process, which allows for refinements and adjustments. After a formal sign-off takes place, the platform is ready for deployment. The final stage is the use of automated pipelines that efficiently “push” the deployment into the client environment, which ensures a seamless transition and integration into the lender’s workflow.
Q: Given your bird’s eye view of the regional banking crisis in early 2023, what was the impact to warehouse lenders?
Berg: The banking crisis did indeed impact warehouse lenders, but in retrospect, I felt there was a bit of a market overreaction at the time. Unlike the 2008 housing crisis, which was primarily a solvency issue, the banking crisis had different underpinnings that did not prove to be as consequential.
Still, it was interesting the way it played out. In fact, in some ways, it was worse. We actually lost more warehouse lending clients this time around than we did in 2008, though that trend had really started a year prior.
Q: Why was it worse this time around?
Berg: For one thing, the housing market had already started struggling when the banking crisis hit. Higher interest rates have a direct impact on the cost of funds for warehouse lenders – plus, the reduction in loan volumes created less demand for warehouse lines. A lot of warehouse lenders were only funding 100 or 150 loans a month, and it’s really hard to keep any kind of margin on that when volumes drop that law.
So when the banking crisis hit, it just placed more pressure on the warehouse sector. Silicon Valley Bank was a significant player in the warehouse space, too, and it became one of the biggest bank failures since the 2008 crisis. That sort of thing tends to get people’s attention.
There has also been a growing discussion about warehouse lending being riskier than it is generally perceived. We don’t think that’s the case—many of our warehouse clients have stuck with it and are doing quite well. But then when the banking crisis hit, we began to see more players exit the market. The stakeholders of these companies looked at what was happening and with the short term nature of the warehouse transaction, saw an easy way to reduce perceived risk.
Q: What is your outlook for next year in the warehouse lending space?
Berg: Based on the forecasts of experts and what the market is looking like, I suspect warehouse lenders will face additional challenges going into the first part of 2024, with conditions hopefully improving later in the year. Right now, we’re seeing two completely different reactions in the warehouse industry. For some lenders, the plan is to continue exercising caution or pulling back entirely. Others see the current market as an opportunity and are going a hundred miles an hour – with our help.
Until things get better, I expect both trends to continue. That being said, I think many of our clients are capable of weathering the storm and will be in a good position when the market recovers. As the year progresses, having the foresight to leverage cloud-based technology will help streamline their operations and give them a strong competitive advantage.
Q: How have ProMerit clients reacted to new cloud-based warehouse lending services and new features?
Berg: When it comes to our cloud-based services, overall, ProMerit clients are really excited about the direction we’re heading. For some existing clients, there have been challenges. For instance, many of our customers have been using our warehouse products for 30 years, so there are a few more specifics involved with transitioning to the cloud.
For new clients, however, cloud-hosted technology is not necessarily a new concept. Most have grown accustomed to being offered cloud-based products and services, so what we’re doing now makes a ton of sense to them.
As for the benefits of our cloud-based version of ProMerit, our clients really love being able to access real-time loan updates and seamlessly integrate the platform with their other systems. At a time when data breaches seem to be an epidemic, they also tell us they appreciate that we made data security our top priority and that ProMerit is SOC-2 certified. To me, this kind of feedback is evidence that we’re on the right track.