Stanley Street: Regulations Could Have Big Impact On Warehouse Lending

PERSON OF THE WEEK: Stanley Street is president of Street Resource Group, which provides information systems and business process consulting to the financial services industry. MortgageOrb recently interviewed Street to get a better handle on recent trends in the warehouse lending sector.

Q: How would you gauge the overall health of the residential mortgage industry? What about the warehouse lending industry?

Street: The overall health of the residential mortgage industry is good and getting better. The market is steadily coming back, and confidence seems to be growing. From a volume standpoint, production is down for a number of different reasons. I noticed the Mortgage Bankers Association recently adjusted its 2014 origination outlook lower. This is affecting warehouse lenders, who have had to adjust to the lower volume.

From a regulatory perspective, there is a lot of uncertainty across the industry. A number of new rules have kicked in this year with regards to qualified mortgage (QM) loans, and we don't know yet what their impact is going to be. Without knowing the liability issues they face, warehouse lenders cannot properly address them. So we are all just waiting to figure out what is going to happen.

Liability for warehouse lenders with participation or purchase agreements is a real issue, but no one yet has any answers on how to assess the potential risk of the new regulations. As it stands, warehouse lenders are relying on the existing reps and warranties from their customers.

Q: You have encouraged investors and banks to pursue new opportunities to extend warehouse lines to small and midsize originators. Is this happening? Why or why not?

Street: I don't think anything has changed significantly yet. Because volumes have dropped off, lenders now have access to more warehouse funds than they did in previous years, so the gap that we've seen is being filled in the short term.

However, because of the tremendous movement among brokers converting to bankers, warehouse lenders that are lending to them are being overwhelmed with applications. Otherwise, few warehouse lenders seem to be willing to lend to this market segment, because of the new bankers' inexperience. Back in the 1990s, when RESPA rules allowed greater compensation for originators who could fund their own loans, many sought and obtained small warehouse lines. The requirements for reporting and managing these lines caused no small number of problems for the warehouse lenders and the neophyte mortgage bankers, due to inexperience. Perhaps warehouse providers are remembering bits and pieces from that time.

Q: What other challenges are facing small and midsize lenders when it comes to securing warehouse funds?

Street: In addition to meeting a lender's conventional criteria, warehouse lenders must now prove they have new levels of compliance and oversight in place because of QM lending requirements. The smaller lenders will have the hardest time with this simply due to their size – they don't have the bandwidth to add compliance staff or analyze and implement new policies and procedures that a larger company does. This will be issue for many. Having said that, smaller lenders are more sophisticated than ever when it comes to serving their borrowers, due to better technology and their inherent customer service cultures. This gives many of them a service advantage over the largest banks, which can seem impersonal by comparison. It could work out that the loan origination system technologies available for small originators and the loan servicing systems used by small servicers will take up a lot of the slack in compliance. Time will tell, but success in this regard will make obtaining warehouse lines easier, particularly for the non-depository smaller lenders.

Q: What effect are higher rates and new regulations having on your clients?

Street: Overall, rates have no effect on warehouse lenders other than how rates impact overall production volume in the market. To the extent that higher rates are suppressing volumes, we'll see a correlating affect on warehouse volume.

Regulations, on the other hand, can have a much bigger impact, particularly on the many smaller and midsize lenders we work with. But again, we just don't know yet what that impact will be, or what liabilities warehouse lenders are facing. We should have a much clearer picture this spring.

Q: How is Street Resource Group helping its clients through these changes?

Street: Street Resource Group has a very close relationship with our clients, including very hands-on day-to-day communications on their operational needs and risk management goals. Right now, however, there's a limit to what we can do because there's not enough clarity with the regulatory picture and in what our clients need or don't need. We're all in "wait and see' mode.

However, Street Resource Group is committed to helping our clients successfully navigate this transition in the market. Right now, we're in the final stages of releasing the next major version of the SRG Warehouse Loan System (WLS), which automates the warehouse lending transaction between bankers and warehouse lenders. Regardless of how things shake out, I believe our WLS is going to be of increasing value to our clients looking to streamline the transaction process. And when the regulatory picture does become clearer, we will be incorporating the needs of our clients into the platform. Technology has never been more important for all aspects of lending, and that certainly includes the warehouse lending sector.


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