REQUIRED READING: Warehouse funding is finally becoming more widely available in the mortgage industry. But lenders – many of which are new to this business – have very stringent lending standards.
In particular, warehouse lenders want assurances that ‘takeout’ investors, the ultimate buyers of the loans, are reliable. If they're not trustworthy, warehouse providers may be hesitant to grant the line.
Takeout investors that do not have the net-worth requirements that lenders want to see might not be able to buy the loans when they need to. Of course, the ideal takeout investor is the warehouse provider itself, which facilitates quick trades and broadens the types of loans lenders can make.
When the housing bubble burst a few years ago, many of the big banks that supplied mortgage originators with warehouse credit pulled back from the business. That lack of liquidity made it difficult for lenders to originate loans, because they had no way to fund mortgages at the closing table.
But now, some smaller banks are getting into the business. With funding costs near 0%, a commercial bank can lend to a mortgage banker at about 5% plus earning fee income. It's not unheard of for a small bank to earn more than $2 million a year from this business.
And regulators, which are usually a tough group to please, generally look favorably on this activity, provided the bank has experienced managers in charge of its warehouse-lending unit. Wall Street firms are also starting to get back into the game.
Having so many new warehouse providers certainly creates opportunities for secondary and emerging players to sweep credit lines quicker, offer more mortgage products with fewer credit overlays and get valuable new business. But while many commercial banks are now eager to get into the warehouse business, they are very selective when lending.   Â
Indeed, many of these lenders have tightened their standards, which often translates into longer turnaround times. It now takes an average of 35 days or more to get loans out of the warehouse, compared to 25 days or less previously. The longer the loan stays in the warehouse, the more costly for the borrower – and the slower turnaround time also makes it difficult to make new loans.
What a lender wants
Specifically, warehouse lenders want originators to have retail operations – as opposed to dealing with brokers – be in business for at least three profitable years, and get a clean bill of health from the auditors. Mortgage bankers must be truthful and prepared to respond to any questions and requests from the prospective lender.
Surprisingly, the most difficult task for many mortgage bankers is putting together up-to-date financial statements in a timely fashion. This is a particular challenge for very small companies, many of which are not well organized.Â
Mortgage bankers must be prepared to furnish warehouse lenders with key financial statements for the past three years, including the following:
- copies of state licenses, bonds and insurance;
- reports showing delinquencies, advances, escrow balances and recent valuations;
- copies of report cards from the companies that purchased the loans; and
- a report showing loan-buyback demands that have not been settled and those that have.
While lending standards are high, many mortgage originators are finding themselves being aggressively pursued by warehouse lenders rather than the other way around. Of course, it is a lot better to have too many warehouse lenders than too few. Too many times in the past few years we've seen originators depend solely on one warehouse provider, only to see that bank walk away from the business with little or no warning, leaving their mortgage banker clients in the lurch.
But rather than be flattered by all the sudden attention, originators need to be careful about which warehouse lenders they do business with. Despite the current abundance of prospective lenders, finding the right warehouse credit provider isn't always easy.Â
In particular, it's wise to be cautious of warehouse lenders new to the business that aren't prepared to be flexible. If they tell you they can't do a deal because it isn't in their guidelines, then find another lender that can. Being flexible is something seasoned warehouse lenders do every day as part of their service.
The best warehouse lenders are aggressive and are always looking to do more business. They give their clients the tools to do more loans, such as by approving and closing lines quickly, granting credit-line increases, being willing to accept lower credit score loans, and accepting lesser-capitalized takeout investors.
Indeed, just as important in finding the best warehouse lender is knowing which ones to avoid. That comes from experience and knowing the landscape. There are some very suspect warehouse providers emerging out there, and it is wise to be particularly leery of a prospective warehouse lender that will not provide references.
There are right ways and wrong ways to shop for the right warehouse provider. Probably the single biggest mistake mortgage bankers make is putting the wrong person in charge of the lender search. For most companies, hiring an experienced professional makes the most sense.
The best partnership, of course, is one where both parties, the warehouse provider and the mortgage banker are happy with the relationship. We recently put together a well-capitalized, experienced mortgage banker with a very busy mortgage broker. The outcome was $100 million of production for a highly specialized product. This same mortgage banker made his warehouse lender very happy because of this transaction.
Bob Rubin is principal of The Business Loan Connection LLC, based in Southfield, Mich. He can be reached at bobr@tblnc.com.
