This presentation explains what warehouse lending is, how the warehouse lending process works, reasons for the current warehouse line liquidity crisis, and solutions to previous problems with warehouse lending.
Warehouse Line Operations
Outsource Management and Operational Support
Titan Lenders Corp
Warehouse Line Lending
Warehouse lines of credit are real estate secured short-term lines of credit that
allow mortgage bankers to fund loans into the secondary market until the loans
are purchased by the end institutional investors. The funding source, (the
quot;Warehouse Lender or Bankquot;), generally offers the necessary funds through a
revolving purchase agreement to a mortgage banking company for funding
mortgages at closing. All of the loans are pre-sold in the secondary market to large
institutional investors, many of which are New York Stock Exchange listed
companies. The warehouse line funding covers approximately a 15 to 30 day
period between loan closing and the sale of the loans to the end institutional
Interest is paid on each transaction on the number of days the warehouse lender
holds the mortgage loan, from the original funding date to the date the funds are
received from the mortgage purchaser. The rate charged is Wall Street Prime or
Libor plus a negotiated margin as well as a per transaction fee to cover
administrative and other related expenses including the wire fee, overnight
deliveries, and the custodial fee.
Current Warehouse Lending Market
According to current estimates, the capacity in warehouse lending has shrunk from
nearly $200 billion in 2007 to a mere $20 billion today through exposure to toxic
loans, fraud, repurchase demand and basic market flight.
Warehouse Lending Capacity
Volume in Billions
2007 2008 2009
Current Warehouse Lending Market
From the previous data, one can see that there is a need for increased capacity.
Major lenders have left most of these business channels as they focus on their
own retail origination, paring mortgage operations. This has opened substantive
opportunities for community banks, securities firms and other non-traditional
sources to offer warehouse lending capacity in a climate of decreased risk, higher
margins and emphasis on quality production. These institutions participation is
seen as integral to an economic recovery through the housing market.
Read more about proposed solutions to the warehouse line liquidity crisis here.
Product Risk: A primary reason behind the collapse of the major
warehouse lenders over the past two years have been the “toxic” loans
with their contingent repurchase demands from low performance, early
payment default and fraud. Most of their major lending partners were
entirely built on these loans… and when the collapse began went out of
business leaving the warehouse lenders with little or no recourse for
recovery. Today, the mortgage market is characterized by very limited
product offerings of the most traditional and conservative varieties. Most
loans are either Agency or Government, and even these have seen
dramatically enhanced underwriting standards. For the warehouse
lender, the lack of competition has created a market climate that is risk
averse, which definitely works in their favor.
Titan manages warehouse lending for only the most risk adverse loans –
Agency, Government and Rural/Bond loans. While we have participated in
hard money operations, we will not manage the warehouse lending aspect
of such loans.
Takeout Risk: Warehouse lenders, once permissive of aging loans, can no
longer afford the risk of loans not purchased in a timely manner. Takeout
risk can be managed in this market through due diligence with regards to
compliance, fraud and quality loan production. Titan often requires its
correspondent partners to employ our closing and post-closing services to
mitigate takeout loss, ensure swift salability and leverage Titan’s reps and
– Fraud checks – Interthinx, Corelogic
– Compliance checks – TILA/HOEPA/ROR/STATE CONSUMER/FNMA POINTS &
FEES – Mavent, Compliance Ease – This ensures that loans are not un-salable
due to errors in compliance.
– Closing and Post-Closing – Titan Fulfillment – Reducing risk of closing errors
that might make loans unsalable on the secondary.
– Titan Experience – Should lenders refuse to purchase or fail to honor a
commitment to purchase, Titan has a broad base of experience in quickly
repackaging loans for sale within the current market or as scratch and dent.
Fraud: There is no way to entirely insulate against fraud.
However, several requirements, including the financials of the originating
lender, help to mitigate losses associated with fraud. Titan manages the
process flow required by the warehouse lending institution to ensure that
every opportunity to mitigate fraud is optimized.
– Borrower fraud – The most insidious form of fraud; it can be mitigated
through the application of reasonable fraud checks through national vendors.
Titan requires that all loans funded under our reps and warrants evidence
some recognized fraud check.
– Settlement fraud – A more subtle fraud that requires the warehouse line to
ensure that the Closing Protection Letter, Errors and Omissions and Master
CPL are confirmed and verified with a major title underwriter. Titan requires
background checks on agent attorney and maintenance of approved
settlement agent lists. In escrow states, verification of funding to the title
agent (not the escrow agent) is required. Additional due diligence is
performed to ensure that there are no illegal affiliations or pre-existing
relationships between the agent performing disbursement and the originator
Titan offers a broad knowledge of the mortgage market, from escrow
states to attorney states to wet funding states. This provides a unique
opportunity for the warehouse lender to capitalize on the safest market
opportunities without requiring regional operations to manage the
complexity of the market. Titan’s foundation of delivering
safe, quality, compliant loans to the secondary provides a unique
warehouse lending experience for the originator, allowing common sense
flexibility to be weighed against the known risks and hazards of a changing
Residential mortgage lending is a unique business model - complex, multi-faceted, and dynamic, to
be sure. Equally, it is error-prone, repetitive, and laden with paperwork and intricate details. Cyclic
by nature, the mercurial demand of and for home loans can tax lender operations to their limits.
Promising mortgage businesses sometimes fail to realize their potential because they have not built
elasticity and scalability into their processes.
At particular risk is the proper execution of closing and post closing functions that are pivotal for
maintaining loan profitability throughout its lifecycle. When a lender tries to manage more volume
than its back office processes and expertise can support, quality lending practices are
compromised. Risk multiplies. Mistakes and delays interrupt workflow. Profits are lost. Critical
business relationships endangered.
Titan Lenders Corp meets mortgage lenders’ and community financial institutions’ need for
industry expertise, elasticity, and scalability. We provide closing services, mortgage post
closing, and other back-end loan processing services to correspondent, wholesale, and retail
residential mortgage lenders. Our experience in these markets has created natural vertical
integrations into warehouse lending management, as well as banking and REO operations.
Unlike many firms offering outsource mortgage services; we are an American business operating in
the continental U.S. Our values include exemplary customer service, process management, and
web-based technology. Our mission is to serve, support, and dominate mortgage back-office
fulfillment in the residential lending industry on a national level.
In general, warehouse lenders traditionally earn approximately 250-375 basis
points on their money. Using an outsourced option for their operations, capital
requirements for overhead, technology and personnel are very limited. Titan
offers a variable cost option of per unit fees to be netted out of disbursement to
the correspondent lender. As a direct per file cost to the lender of $125-155 per
unit – depending on volume, the lender and the warehouse lender are able to
scale their business model based on opportunity rather than capital requirements.
Correspondent File Flow Chart:
Origination Underwriting Closing Funding Post-Closing
•Correspondent •Correspondent •Correspondent •Warehouse Lender •Investor
•Investor •Investor •Community Bank •Third Party Titan
•Third Party Titan •Securities Firm
Titan provides a wide variety of operational expertise for both the primary and
secondary mortgage market. As such, we have a very unique perspective on the
requirements of investors to purchase loans, how to forestall salability
issues, clarify process and procedures necessary to avoid repurchase, fraud and
errors in production effecting salability and take corrective measures quickly and
efficiently should the worst case scenario happen. We understand the needs of
the warehouse lender, the originator, the investor and the regulator.
Titan has not worked with a single stand-alone warehouse lender that operates
under these specific parameters – with the breadth of experience to understand
both the primary and secondary markets. With a variable cost model and
embedded technology, banks, credit unions or securities firms can enter the
market without huge investment in infrastructure. They can also pilot programs
on a smaller scale, taking their capital to market in a very structured, process
driven environment. When these processes are refined and perfected, our clients
can scale up, down, regionally, nationally, conforming or niche.
More Information About Warehouse
5353 West Dartmouth Avenue
Denver CO 80227
For additional questions, customized pro-forma or Visio process flow… please
contact Ruth Lee.