KEY POINTS
OF THE WAREHOUSE LINE

Written by Jerry Walters

Jerry Walters is the Senior Vice President and National Director of Sales & Marketing for NattyMac Capital LLC, Saint Petersburg, FL. 

What about the warehouse line?  Whether you already have a warehouse line, or are a broker looking to transition to a banker, here are some key points to focus on when considering one.

The Warehouse Line A mortgage warehouse line is a short term line of credit secured by the underlying mortgage.  A typical line will be extended for one year and reviewed for renewal annually thereafter. 

The Application Process:  The credit process involved with a new application will vary from lender to lender.  Each has their own credit policy guidelines.  Some warehouse lenders are affiliated with or subsidiaries of banks.  Many of these have a more bureaucratic credit process, which often times lengthens the review and decision cycle.  Proper due diligence is the key to any new relationship.  The information that a warehouse lender will ask for may seem a bit overwhelming, however it is necessary for them to completely understand your company and assess its credit risk.  It is imperative that the applicant provide all of the information requested up front.  Otherwise, the application process may stall.   If all of the information is provided as requested, it should take a warehouse lender only a few weeks to provide a credit decision.  Ask about their process and decision times at time of application. 

Warehouse Periods:  The warehouse period will vary from lender to lender and depends on the types of mortgages being warehoused.  It is typically set somewhere from forty-five to ninety days.  This is the amount of time allowed on the line before curtailments – or principal reductions - and/or an interest rate increase.

Purchase/Sale structure or Typical Borrowing Relationship?  A Purchase & Sale relationship is set up to work just like a typical borrowing warehouse relationship.  The exception is that the legal documentation is worded in a manner that determines the warehouse agent the “buyer” and the mortgage banker the “seller”.  As such, the Purchase & Sale Warehouse provider acts as the “interim buyer” of the mortgage.  Often times, the advantages afforded the mortgage banker in these relationships are that the transactions are effectively “off balance sheet”.  This treatment will allow more product to flow through the line without escalating the Debt to Tangible Net Worth Ratio (aka Leverage Ratio).  Additionally, these types of relationships will often set a current ratio that is less restrictive than a traditional borrowing warehouse relationship.

Errors & Omissions and Fidelity Bond Coverage:  This is a must have:  Keep in mind that there are two different types of coverage that are called Errors & Omissions. The first type is called Professional Liability Errors & Omissions.  The demand for this coverage is growing due to the litigious nature of our society. This coverage is specifically designed for the exposures of mortgage brokers and mortgage bankers.  It pays for defense costs for lawsuits arising due to errors & omissions for professional services.  The second type of E&O coverage is called Mortgages E&O or Mortgage Impairment.  This is coverage for the following losses to your mortgage interest in real property caused by failure to obtain or maintain 1) Fire and extended coverage; 2) Mortgage redemption life insurance, accident &
health insurance and, 3) flood insurance.

Fidelity Bond Coverage is written to protect the mortgage broker/banker from losses incurred due to employee dishonesty, forgery, theft of cash, credit cards and securities, Computer fraud and Robbery, burglary and misplacement.  It is important that the broker/banker shop carefully and wisely as coverage premiums vary widely! 

(Contributing to this discussion was David Jackson of Mortgage Ins. Agency, Chicago, Ill)

The Warehouse Spread:   The warehouse spread is the difference between the Interest Earned on the loans in inventory and the Interest Paid on the borrowings from the line to fund these loans.  With commercial rates climbing and mortgage rates remaining low, many warehouse spreads have been reduced. One should not look at the warehouse spread as a steady income generator due to this fluctuation.

Pricing, Fees, Compensating Balances:  Consider the rate of interest assessed.  It will usually be a floating rate; some base their spread against the prime rate, others on the 30 day LIBOR.  Will there be a commitment fee, application fee, closing fee?   Additionally, once the line is in place, what are the fees for each outgoing wire, for each mortgage package processed?  Lastly, warehouse lenders will typically charge an “unused line” fee and some charge for renewals, covenant waivers and overlines.  Some warehouse providers are affiliated with banks and will require compensating balances in order to maintain your interest rate.  You should become aware of all fees and requirements before you apply.

Technology and Reports:  There are differences relative to the level of technology and available reports between each warehouse lender.  Many mortgage bankers wish to utilize the most recent technology in which to expedite the warehouse process.  Can you capture your advance requests on your computer for electronic filing and/or email them to others in your organization for review?  Or will you be required to print them, manually file them and feed into a fax machine to the warehouse company to get a funding request completed? 

Additionally, will you have access to your warehouse account around the clock?  Can you review your warehouse activity in “real time” or is it a day old?  What about available reports?  Can you capture reports and store them electronically for future viewing and forward those via email for others to review via the internet?  Or do you have to print them and shuffle them around to others?

Adequate Liquidity, Net Worth and Profitability: It is important that a mortgage banker possesses and maintains an adequate capital base.  You’ll be selling to investors who will typically require non-performing loans to be repurchased. Each of these companies may differ in their requirements, but typically a first payment default, or non-performing loan within the first 12 months will require repurchase.  The warehouse lender may provide you with an allocation to place these loans for a limited period.  However, if you are new to mortgage banking, or do not have adequate capital, you’ll be pressed for time to make good on this request.  Leverage (Total Liabilities / Tangible Net Worth) is typically pegged at a benchmark of 15:1.  Furthermore, does your company have a consistent level of profitability?  Liquidity ratios are important to consider as warehouse lenders will require a customer to maintain a current ratio (current assets / current liabilities) to be maintained.  Some require a higher ratio than others.  Maintaining adequate cash reserves are necessary.

Quality Control: A very critical component of a mortgage banking operation. It is imperative that the mortgage banker has a comprehensive QC policy that is diligently applied and adhered to in order to assure that loans will be of investment grade quality and will be purchased off the line by the investor quickly.  A copy of this concise written policy and sample reports should be made available to the warehouse lender.  There are outsourcing companies that will perform this critical function and provide management with reports.

Approved Investors:  Every warehouse lender will have a list of approved investors, those which have been cleared by their internal credit departments.  Some warehouse lenders require that a certain percentage of your loans are sold to their affiliated correspondent division.   Will your warehouse lender place volume requirements into your agreement, or are they independent?

Haircuts:  Typical advances are up to 98% of the selling price of the mortgage loan, up to 100% of the note for conforming, government “A” and “Alt-A” paper.  For sub-prime, advance rates vary from 98% of the note amount to less.

The Closing Process- A Very Important and Often Overlooked Part! The mortgage banker must ensure that they have sufficient back office staffing to schedule, close and process the loan packages.  This execution is a vital part of the banker/warehouse process!  It is imperative that this runs smoothly and without a hitch.  Otherwise, you run the risk of alienating your investors and warehouse bank, and just as important your loan officers, customers!

There are outsourcing companies for warehouse line management available to the transitioning and growing banker.  Why outsource? First of all, it reduces overhead since there’s no need to hire and train your own team.  Outsourcing companies have scaleable teams and proven practices that streamline the closing process and immediately allow you to increase your total volume.  Lastly, it enables you to grow with no additional expense since closing package costs can be passed on to the borrower.
Before you engage a company and outsource this task, you should consider whether or not the firm has working relationships with a significant portfolio of investors.  Do they have experienced closers specifically trained to individual investors’ applications?  Are they capable of customizing/programming lender-specific forms?  Can they expediently print and send documents electronically directly to the title company or closing agent?  Are they flexible and can they customize their services to your specialized needs?
(Contributing to this discussion was Jan Manning of Tradewinds Mortgage Document Preparation Company, Clearwater, FL.)

Funding Requests:  What is involved with a funding request?  Does your warehouse lender offer electronic transmissions?  These offer a paperless wet funding option which saves time, reduces costs, increases capacity and reduces risk of human error.  Ask if this is available, and if so, will you be required to purchase additional software or invest in the re-programming your LOS system?  Or will you be able to transmit closing information directly from your LOS or front-end system to the Warehouse Lender’s system through a secure web site.

Are you dealing in wet funding states?  If so, what will your warehouse lender require with a new request?  What will they require to dry the loan out?  Will you be required to duplicate the investor file or a large portion thereof?  Some warehouse lenders will be more comprehensive and paper intensive than others, mainly as a function of their credit policy and risk appetite. 


A Typical Warehouse Transaction:

A typical transaction of a mortgage banker utilizing a mortgage warehouse line:

1. You submit a purchase advance request package to NattyMac

2. We approve the package, and funds are sent directly to the closing agent.

3. Upon closing of the mortgage loan, the closing agent sends the original mortgage note and a copy of the HUD 1 directly to us. The balance of the closing package is sent to you.

4. You post-close the mortgage loan and prepare a collateral package for delivery to us and your investor.

5. A request for shipment of the note to the investor is included in your collateral package. This request includes endorsement and shipping instructions.

6. We endorse the note and forward it to your investor accompanied by our Bailee Letter.

7. The investor wires the purchase proceeds to a Payoff Account at NattyMac

8. We notify you of receipt of the wire and you send us a fax identifying which mortgage loans are to be repaid and copies of the investor's purchase advice.

9. We repay the original purchase advance amount and the net difference is deposited into a checking account you establish with NattyMac