Bob Rubin December 10


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Bob Rubin December 10

  1. 1. Wa re h o u se L e n d i n gFinding a GoodMatch BY BOB RUBIN Warehouse lines are tricky business today. With banks generally gun-shy about the mortgage business, smaller lenders need some pointers to help find a willing provider. REPRINT ED WITH PERMISSION FROM THE MORTGAGE BANKERS ASSOCIATIO N (MBA) M O R TG A G E B A N KI N G | D E C E M B E R 2 0 1 0
  2. 2. F rom lush green to desert sand, the warehouse lending topography in recent years has been drained of liquidity. It even got to a point where those seeking warehouse funds were best advised to have with them someone who knew how to find the fertile fields of funding. And that proved any- thing but easy when so many spigots had been turned off to the frontline originator. In the aftermath of the housing I market crash, warehouse capacity fell from around $200 bil- lion in 2007 to around $20 billion in 2008, according to—an unbelievable 90 percent drop. Andalthough things have improved more recently, that warehouse capacity num-ber remains low, as some smaller warehouse lenders are essentially maxedout with little interest in expansion due to their asset and capital size. INew financial reform laws are only making it harder on the wholesale mort-gage market, as are recent restrictions on non-federally insured depositoryinstitutions and loan officer compensation. A lot of brokers who had beenactive with wholesalers will go away because of the new compensationrules. Indeed, figures released in late summer by National Mortgage Newsrevealed that loans originated through mortgage brokers fell 51 percent inthe second quarter of this year, accounting for just 10.5 percent of origina-tions nationwide—a new low. IMany of the remaining brokers will grav-itate to working for national banks because of new stricter licensing require-ments. The weaker brokers who don’t have a tangible net worth of at least$1 million are likely to simply disappear. Without a doubt, it has become Imuch harder to run a wholesale lending operation today—especiallyin accordance with new Federal Reserve rules that limit loan originatorcompensation, combined with a prohibition on yield-spread premiumscarried in the Dodd-Frank Wall Street Reform and Consumer Protection Act. M O R TG A G E B A N KI N G | D E C E M B E R 2 0 1 0
  3. 3. Hopeful signs they would like to sponsor; however, FHA lenders willOf course, even the darkest cloud can have a silver lining, assume responsibility for their sponsored TPOs, satisfy-and some larger companies are showing signs of interest ing FHA requirements regarding loan origination andin warehouse lending again. Bank of America, Charlotte, processing.North Carolina, reported its warehouse lending rose in the Originators who are doing all of the right things cansecond quarter to $15 billion in commitment volume. find themselves left high and dry by their warehouseEven though originations are trending downward—the lenders. Those providers who remain are sticklers onMortgage Bankers Association (MBA) projects $1.4 trillion what they want, which includes retail operations (notin 2010 and $996 billion in 2011—originators are feeling brokerages), at least three years in business, enough per-the pinch of having their warehouse funding delivery sonal wealth of the owners so a guarantee means some-times stretched out, which deepens the need for additional thing. A company also should be profitable and get highlines even with dropping volumes. marks from the auditing team. The first signs of this shift occurred almost a yearago, when GMAC targeted an expansion of its ware- Difficult time locating the right bankhouse lending operations. This was followed by similar Finding a new warehouse lender is complicated further bymoves by BB&T Corporation, Citigroup Inc., JPMorgan the fact that many commercialChase & Co. and Sterling Warehouse Lending. In addi- banks are not keen on having any-tion, Freddie Mac launched a pilot program to support Some larger thing to do with the mortgage busi-warehouse lending, while MetLife announced in Sep- ness right now. Even mortgagetember that it was entering the mortgage warehouse companies are bankers that have very solid finan-business. cials and seek more warehouse facil- All are hopeful signs, but they mask the fact that showing signs ities have a difficult time locatingwhile large banks offer warehouse lines to originators t h e r i g h t b a n k . I t ’ s a c a t ch - 2 2 ,having a net worth of more than $5 million, the vast of interest in because when you do business for amajority of mortgage originators with limited, if any, long time with one banking institu-financial sources are not invited to the party. warehouse tion, you tend not to have too many One lender that had done business for 14 years with its fallback relationships available.wholesale funder, never experiencing a loss in all that lending again. As a result, mortgage bankers aretime, was advised after two strong years in 2008 and 2009 scouring the landscape in search ofthat its financing was being discontinued, echoing similar new warehouse lending sources, butmoves across today’s constricted funding landscape. this can be a tough assignment. Even when money is available, it can take nine While they may develop a list of names, the single biggestmonths or more of agonizing negotiations for these mistake that my company sees is putting the wrongwarehouse relationships to develop—if they do at all. It’s person in charge of finding a new warehouse lender.a tortuous process with long checklists and no term Ideally, the best scout would be the company owner,sheets provided upfront. but he or she usually doesn’t have the time to do this and Warehouse providers want to scour internal files with typically delegates the job to someone else—in whichno assurances they will provide any financing in the case the owner still should closely monitor the situationend. It’s not unusual for the large institutions to set a and know exactly what’s going on. The designee, obvi-high FICO® floor, cherry-picking loans at the lowest pos- ously, must be someone who:sible price. In contrast, local banks are becoming great I is responsible and accountable;allies—especially those with no prior mortgage plat- I knows what’s going on inside the company and inform; they offer an opportunity for collaborative growth. the industry at large; I is passionate about the company;Some can’t make the cut I pays strict attention to details; andFor businesses trying to expand, the need for additional I responds promptly to requests from prospectivewarehouse facilities to meet their production levels is frus- warehouse providers.trated by warehouse providers disappearing and leaving Oftentimes, warehouse lenders can tell how well man-their mortgage banker clients in the lurch. Some mortgage aged a company applying for a line is in terms of itsbankers just can’t make the cut. response time for producing requested documentation. The Federal Housing Administration (FHA) has been Too often, a junior person is put in charge of the ware-stepping into the breach to fund independent mortgage house lender search. But this person usually doesn’tbankers. Now, though, the agency is increasing its net- know what questions to ask. It is not uncommon for aworth requirements for lenders to $1 million, under a less-experienced in-house person to fail to find the bankfinal rule issued this past spring. For FHA-approved with the right fit.small-business lenders, the net-worth requirement will There are several characteristics mortgage bankersbe $500,000. However, third-party originators (TPOs) need to look for in a warehouse lender, including:will no longer receive independent FHA eligibility I an aggressive appetite for issuing new warehouseapproval. facilities; The final rule will relieve FHA lenders of the respon- I an interest in doing larger lines;sibility to obtain prior FHA approval of the TPOs that I the ability to approve and close lines quickly; M O R TG A G E B A N KI N G | D E C E M B E R 2 0 1 0
  4. 4. I a total understanding of the residential mortgage have adequate capital to survive and; and Warehouse lenders want to see all key financial state- I the ability to analyze, inspect and do a thorough due ments for the past three years; copies of state licenses,diligence within a short period of time. bonds and insurance; a report showing delinquencies, advances, escrow balances and recent valuations; copiesRolling out the red carpet of report cards from companies you have sold loans to;Some warehouse banks are perfect fits for front-line and a report showing loan buyback demands that havelenders. They know just what they want. If they see a com- not been settled—as well as those that have.pany they want to do business with, they will roll out the Once burned, twice shy of mortgage fraud, commercialred carpet and close a transaction within 30 days. banks want to be absolutely sure they know who they’re In one recent transaction my company was involved dealing with. So, the mortgage banker applicant must bewith for a lender, a first-choice warehouse provider was truthful and prepared to respond to any additional ques-called and a conference call was arranged. Four days tions and requests from the warehouse lender.after the meeting, the warehouse provider received anovernight package from the mortgage banker with a very New interest from small bankscomplete application and all the required attachments. Despite the ongoing problems in the mortgage businessFive days after that, the chairman of the bank and the and in banking at large, warehouse lending can be a verypresident of its warehouse division met with my clients. profitable business for commercial banks. In particular,At the end of the meeting, the chairman called a special many very small banks, which are having trouble makingmeeting of his board of directors to approve a $100 mil- money elsewhere, are now interested in this business. Atlion mortgage warehouse facility, which has since been close to zero percent, they have low funding costs and canincreased to $200 million. The line was closed in just lend out to a mortgage banker at about 6 percent, plusthree weeks from the date of receiving the application. earn fee income. A small bank can earn more thanNow, that’s the way to do business. $500,000 a year from this business. Just as important as finding the right warehouse Every day, mortgage bankers face the prospect of newlender is knowing which ones to avoid. This knowledge laws, rules and requirements that can put them out ofcomes from experience and taking the pulse of the mar- business or drastically affect the way they do business.ket every day. Power struggles between the Securities and Exchange There are some banks that are simply time-wasters; Commission (SEC) and the FDIC, and new financialfrankly, they seem to make their money by collecting reform laws seem to be directed by those impervious tooutrageous application fees. Many banks want deposits their negative implications to the availability and cost ofupfront. There is one bank that issues lots of commit- mortgage financing to the public.ments and charges a $10,000 application fee for each. Trade organizations and special interests are pushingYet, nobody can talk to the president of its warehouse back with education on this, but the hard direction fromdivision and key people do not return phone calls. This the Obama administration seems to be there is no roominstitution was reported to the Federal Deposit Insurance for compromise when it comes to financial regulatoryCorporation (FDIC), though we never heard of anything reform.that happened as a result. Given these industry developments, it makes it all the Sad to say, too many bank personnel just don’t under- more vital to know how to get a warehouse facility—stand customer service. Some of these people simply which banks to avoid and which to contact based on suc-enjoy making their clients jump through hoops. They cess and experience.seem to love saying “no.” Finally, beware of making a decision based strictly on Once the key warehouse lender has been identified, price. Some of the lowest-priced warehouse providersthe mortgage banker must be prepared to promptly pro- insist that all or most of their clients’ production go toduce the required financial information. The trickiest that particular warehouse provider. The mortgagetask can be assembling fresh, year-to-date financial state- banker is not assured that the bank’s pricing will even bements. This can be a major challenge at the very smallest in line with other pricing in the market.of companies, many of which are not well organized. Because of this captive nature, the mortgage banker Probably the most important document that should be could find itself in a situation that is very costly.included is an executive summary of the company. Many Between being out of compliance and paying extremelydo not have these available or may not know how to pre- large pair-off fees, it is a no-win situation even when con-pare this most important document. sidering the low rate and fees of the warehouse bank. So, what does it all mean? Be careful and choose theLooking at their QC process right bank that will not suddenly deliver (unpleasant)It is important to look at the mortgage lender’s executive surprises. MIBsummary and tie in projections from actual results. Anoth-er important step is to look at the lender’s quality-control Bob Rubin is principal of The Business Loan Connection LLC, Southfield,(QC) process to see if it, in fact, is something that is Michigan, a financial services firm that specializes in matching mortgagedesigned for that particular mortgage lender. In short, bankers with well-run banks that issue mortgage warehouse facilities. He haswarehouse providers are seeking mortgage bankers that more than 35 years of experience in the real estate and mortgage financeknow what they are doing—those that are profitable and business. He can be reached at M O R TG A G E B A N KI N G | D E C E M B E R 2 0 1 0