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].
