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Warehouse Line Operations


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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.

Published in: Business, Economy & Finance
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Warehouse Line Operations

  1. 1. Warehouse Line Operations Outsource Management and Operational Support Titan Lenders Corp
  2. 2. 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 investor. 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.
  3. 3. 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 250 200 200 150 115 Volume in Billions 100 50 20 0 2007 2008 2009
  4. 4. 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.
  5. 5. Risk Mitigation 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.
  6. 6. Risk Mitigation 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 warrants. – 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.
  7. 7. Risk Mitigation 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 or borrower.
  8. 8. Experience 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 market.
  9. 9. About Titan 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.
  10. 10. Warehouse Lending Process Flow
  11. 11. Projections 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
  12. 12. Why Titan? 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.
  13. 13. More Information About Warehouse Line Lending Contact Ruth Lee Vice President 720.279.7279 5353 West Dartmouth Avenue Suite LL50 Denver CO 80227 -------------------------------------------------- For additional questions, customized pro-forma or Visio process flow… please contact Ruth Lee.