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15- vs. 30-year loans

National Mortgage Professional
Dec 06, 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 products. 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. Commitment 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 delivering. 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) 669-2300.
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