Grow core business with warehouse lending alternativeStuart Waldmanwarehouse lending Most, if not all, mortgage professionals face difficulty in securing sources of funding for their origination programs at one time or another. For mortgage bankers, it may be fallout loans tying up traditional warehouse lines, forcing them to frantically seek alternative investors. For portfolio lenders, funding often comes from a variety of sources - bank warehouse lines, private investors and even friends and family. For them, the issue may be that they do not have enough capital or even that they are managing multiple sources of capital and bank warehouse relationships, which can become an administrative burden and limit potential portfolio growth. Still for others, they may find their business poised for growth without available capital to fund their origination programs. Whether you are a mortgage banker, portfolio lender or somewhere in between, the availability of an alternative financing source when existing warehouse lines are unavailable can have a significant impact on your origination business. The traditional warehouse lending process is as follows: 1. A mortgage broker closes the loan. 2. A mortgage banking company buys the loan at the time of closing. 3. A bank funds the mortgage banking company using a warehouse line. 4. An investor company buys the loan as part of a pool of loans sold by mortgage banking company. 5. An individual or corporate investor buys bonds sold by the investor companies on the secondary market. The alternative Permanent warehouse funding is an alternative to the traditional warehouse line, converting relatively small pools of loans, i.e., $10-75 million, into securitization products. This alternative offers mortgage professionals a unique form of permanent funding that enables continuous loan origination and guarantees an end investor. Unlike traditional warehouse lending, permanent warehouse funding enables mortgage bankers and brokers to retain an economic interest in their loans while freeing lines of credit for continuous loan origination. Each individual funding is structured as a sale of loans, but the originating institution or one of its affiliates keeps all income, less the agreed upon facility interest rate. The physical servicing of the loans can also be retained by the originator or transferred with the loans. Loans eligible for permanent warehouse funding include stated-income, stated-asset and equity-based loans; sub-performing and non-performing loans; loans originated outside of investor guidelines; commercial loans including special purpose properties; multi-family or mixed-use property loans and high loan-to-value loans. The process for setting up permanent warehouse funding is no more difficult than securing a traditional warehouse line of credit: 1. The originator and the provider agree on the criteria for loans to be included. 2. Based upon the agreed-upon criteria, the originator and the provider will agree upon an effective advance rate and an effective interest rate. Advance rates typically vary from 70 to 97 percent, with interest rates as low as prime plus 0.50 percent. 3. The originator and provider enter into a conditional commitment letter. 4. The provider completes a limited due diligence review of the proposed loans. 5. The originator and provider execute final transaction documents. 6. The loans are funded typically within 30-45 days of the execution of the conditional commitment letter. Once the agreed upon volume of loans is reached (usually a minimum of $5-10 million), the loan pool will be securitized, whereby the provider will own the senior security and the originator, or the originator's affiliate, will purchase the subordinate security. Cost is always a concern. Typically, other than a fee charged to buy down the facility interest rate, mortgage professionals engaging in permanent warehouse funding are only responsible for the cost of their own legal counsel to review the transaction documents. Alternative benefits Used either as a replacement for or in conjunction with traditional warehouse lines of credit, permanent warehouse funding benefits every player in the mortgage process. It is non-recourse, requiring no personal guarantees on the lender's part. This is especially beneficial for specialty lenders whose warehouse lines are tied directly to their personal assets. In the case of this type of funding, the seller and the lender agree upon the loan criteria upfront, ensuring the lender will not be obligated to buy back the loans. This provides a permanent funding source for the life of all loans originated under the program. As a result, lenders can enjoy the net interest income of a growing mortgage portfolio instead of selling loans to pay down their warehouse lines. Permanent warehouse funding targets those with a long-term view of the value in their assets and as a result can help mortgage professionals focus on growing their core business, instead of simply maintaining current funding. Stuart Waldman is a managing director of Miami-based Bayview Financial LP, a real estate lending and investment finance company. He may be reached at [email protected].
About the author