15- vs. 30-year loans

15- vs. 30-year loans

December 6, 2004

Control-Responsibility-Accountability: The Power of a Warehouse LineGary D. ClarkWarehouse lending, mortgage banker, correspondent seller,warehouse lender
The mortgage industry is going through changes that are
affecting both the large and small originator. Large direct lenders
are increasingly marketing to the consumer, and a new breed of
lender, the "Internet Lender" is beginning to garnish a rising
market share. This is a result of the continued compression of
profit margins in wholesale lending, causing many lenders to move
closer to the consumer, and the rapid explosion of the Internet.
With increased information available on the Internet combined with
the continued decline in computer prices, consumers are logging
online daily to find information, products, and services quicker,
easier and cheaper.
The mortgage professional of the future is going to need to
exercise greater control over the lending process to compete in the
rapidly changing marketplace. With the continued growth of
technology in the lending process, the credit decision is moving
closer to the point of origination. Technology is currently
available from government-sponsored agencies that permit the
electronic underwriting of conforming loans. With the advent of
e-MITS by IndyMac, loans of all types, both conforming and
nonconforming, can be electronically underwritten and rate-locked
in minutes. This leaves the closing phase as the last facet of the
origination process where a mortgage broker or banker can exercise
control or, in the eyes of the consumer, lose control. The key to
gaining control of the closing phase is acquiring a warehouse line
of credit and thereby transitioning from mortgage brokering to
mortgage banking. In doing so, the mortgage banker can exercise
control over the origination process (and the consumer) through
closing, yet continue to offer a wide variety of loan
Gaining control of the closing process by using a warehouse line is
often reason enough to make the transition from broker to banker.
The ability to produce that critical set of closing documents
within 30 minutes is priceless, especially when you are dealing
with "your best customer." Beyond the ability to have greater
control over the transaction, there can be financial benefits as
well. Mortgage bankers have greater opportunity to generate fee
income, and the sale of closed loans typically produces a better
price. Additionally, by becoming a banker and selling closed loans,
originators can take advantage of RESPA's secondary market
exemption and avoid the characterization and disclosure of this
income as yield spread premiums. Finally, the ability to be viewed
as the lender by your customer places your firm in a different
light when dealing with the consumer. As with most changes, there
are some questions and issues to review before proceeding with a
warehouse line.
Do I need a large net worth?
No you don't. There are a variety of warehouse providers with
different lending options. Depending upon the warehouse provider
and the size and terms of the line, the net worth requirements will
vary. Typically, the larger the warehouse line commitment, the
larger the net worth requirement. However, there are warehouse
lines available that require no minimum net worth. These lines are
geared towards the mortgage broker who wants to make the transition
to become a mortgage banker, but may not currently meet the
requirements to receive a traditional line.
You may find that a minimum net worth is required to access some
correspondent lending programs. Many of the larger investors
require a minimum audited net worth of $100,000 and, in some
instances, as high as $500,000. Check with a few warehouse lenders
to determine their net worth requirements and ask them which
investors would be best suited for a company your size.
Will I have to supply audited financial statements and other
documentation to obtain a warehouse line?
Depending on the type of line and the individual requirements
of the warehouse lender, audited financials may be required, along
with information on the corporate officers, errors and omissions
insurance, corporate history, personal guarantees, and other normal
documentation on your company. Remember that you and your company
are applying for a loan, generally in the $2 to $10 million range.
Proper documentation is going to be required.
Will I need additional operations staff?
Typically in the beginning, adding a warehouse line will not
require the addition of staff. You will need to have at least one
person dedicated to learning the procedures until you have
sufficient volume to warrant dedicated staff. Remember that you
will be taking on the responsibility of drawing loan documents,
reviewing and funding the loan, preparing a collateral package, and
shipping the loan to the investor for purchase. To offset this
additional cost, most mortgage bankers charge a funding or
administration fee. While the amount of this fee may be limited by
applicable law and should be reasonably related to the market value
of the services provided, originators commonly charge between $250
and $600 per loan in most jurisdictions. Once your volume grows to
15 or 20 loans per month under this program, this additional
revenue easily offsets your additional costs.
Are there different types of warehouse lines, and which one
is best for me?
There are several types of warehouse lines available today,
and just like mortgage loans, you need to take the time to
determine the right one for you and your business. The main
difference between types of warehouse lines can be generally
classified into two groups: the amount of documentation required
for the approval of the warehouse line, and the amount of
documentation required by the warehouse lender at the time of
individual loan funding. For example, a warehouse line may be
granted without a net-worth requirement, without audited
financials, and without a requirement for personal guarantees. But,
that line may also require a firm clear commitment for purchase
from the end loan investor along with a specific rate lock for that
loan. This is not unreasonable, considering the minimum amount of
documentation provided at line approval. This would compare to a
traditional line that would require audited financials, E & O
insurance, personal guarantees, and quarterly certifications.
However, at time of funding, less documentation would likely be
required from the end loan investor for you to fund the loan on
your warehouse line.
Training the existing operations staff
Instead of just processing and submitting on a brokered
basis, your operations staff will have additional responsibilities.
The new responsibilities include preparing loan documents,
reviewing the loan funding, preparing a collateral package for the
warehouse lender, and shipping the loan package to the end loan
investor. It is critical that a tracking system is utilized to
ensure that loans are purchased timely by each investor and that
loan proceeds and interest is accounted for properly. Remember that
when you fund the loan at closing, you are now the lender of
record. You incur interest expense on your warehouse line, but you
are also receiving interest income from the consumer as the lender.
In some instances, this may require year-end reporting (1099's) to
the consumer for interest paid to you as the lender.
Getting approved as a Correspondent Seller
The majority of the mortgage brokers today primarily
originate conforming and/or government loans. Alt-A and sub-prime
loan programs make up a smaller percentage of overall production.
To finance a conforming or government loan on your line, you will
need to be approved with investors as a Correspondent
Seller. While you may be approved to broker loans to
investors that you deal with today, to sell them a closed loan may
require additional approvals. This is a common oversight for many
mortgage brokers as they make the transition to mortgage bankers.
Because you are approved as a wholesale customer by an investor
does not mean that you are automatically approved with them as a
correspondent seller of loans. Most conforming investors have
minimum net-worth thresholds and a separate application process to
become a correspondent seller. You may even have to leave your
existing relationship and establish one with a new group in a
different location. Warehouse providers will require proof that the
appropriate relationship has been established with the investor
prior to funding.
It takes a commitment on the part of the mortgage broker
to make the transition to Mortgage Banker. It is not a transition
that should be done by everyone, and once the decision is made, a
commitment from the top must occur. It is human nature to resist
change, and learn new procedures. Leadership must come from the
senior management of the company to drive the changes required to
make the transition from broker to banker. The rewards can be well
worth the commitment.
In conclusion, not all mortgage brokers will want to become
mortgage bankers. There is nothing wrong with not making this
transition. The mortgage broker today fills a vital role in our
economy and industry. Will not making the change have an impact on
the future of mortgage brokering? Perhaps, but one thing is
certain-with control comes responsibility and accountability. By
becoming a mortgage banker and operating with a warehouse line, you
become responsible and accountable for the mortgage lending process
as it will be known to your customers. I challenge each of you to
take on that responsibility and deliver to your clients the
outstanding customer service that you are capable of
Gary D. Clark is President, Consumer Division of IndyMac.
IndyMac offers a variety of lending products to mortgage brokers
nationwide. One of the operating units that comprises the Consumer
Division is Warehouse Lending Corporation of America which provides
warehouse lines of credits to mortgage bankers throughout the
United States. Gary is a 25-year veteran in mortgage banking, and
has been with IndyMac since 1995. He can be reached at (800)