Warehouse Lines of Credit

Warehouse Lines of Credit 101

Warehouse lines give you the ability to fund loans in your own name, with your own money, which gives you a number of important features and benefits. The following is a quick review of the process, the responsibilities, and the benefits of how a Warehouse Line of Credit can give you more options and greater profitability as you grow your business into the next level in the Mortgage Banking process.

Are you wondering how you are going to survive after RESPA disclosure rules are adopted? Is your business growing consistently beyond a million per month? Are you looking for ways to improve your profitability? Do you feel that you are good at packaging Loans? If you keep nodding your head, then you should be thinking about getting a Warehouse Line of Credit. Warehouse lines of credit provide Mortgage Brokers the cash flow and credibility needed to make the leap to the next level in the industry: Mortgage Banking.

The Mortgage Banking process

Mortgage Banking is a process of originating and gathering loans, then selling them to large investors who wraps them together into pools where they are reviewed, graded, insured, and securitized into Bonds. These Mortgage Backed Securities are sold to Institutional and Individual Investors whose cash is traded for the security, which provides for the process to complete its circle and repeat itself.

The key to the Mortgage Banking process is cash flow. Cash flow is the lifeblood, which gives the Mortgage Banker the ability to originate, process, package, and deliver closed loans through Correspondent relationships to investors based on their underwriting criteria.

How do Warehouse Lines of credit work?

As a Mortgage Banker with a Warehouse line you will be involved in a close relationship with the Warehouser and you will be responsible for many closing and logistical functions. You must deliver closed loans to your investor. Those loans must be funded and shipped along with the closing documents and delivered to Escrow and the Warehouser. The payoffs must be calculated, the wires or checks must be made, and the exceptions and problems must be reconciled in order to take the loan off the line and deliver the loan to the investor.

A Warehouse Line is a Credit Line used to fund loans at the closing table. The mortgage loan is originated and underwritten to investor standards based on sound QC procedures, then it is delivered to the Warehouse Lender in exchange for funding the closing of the mortgage note. The note is carried or housed on the Warehouse Line for a period of time (usually 7 to 21 days) until it is called for delivery to the investor. After the investor wires funds to the Warehouse Lender to purchase the loan, an accounting is done to reconcile the cost and fees for the line, and then the proceeds including the Service Release Premium are forwarded into the account of the Mortgage Banker. The process of moving notes on and off the line is called the monthly flow.

Can I become a Correspondent with my key Investors?

As a Mortgage Banker you can take advantage of full Correspondent pricing with your most important investors. Since you are now selling closed loans, you receive better pricing and services release premiums, as you are taking the responsibility of underwriting, packaging, and delivering the notes to the Investor. You will need to complete a correspondent agreement. You may be required to have a Fidelity Bond and Errors & Omissions insurance to warrant your adherence to underwriting standards and QC procedures of the Investors you sell to.

What types of Warehouse Lines of credit are there?

Non direct lines are pure Warehouse credit facilities. These Non-directed lines tend to operate with greater flexibility. You generally have more choices with the investors used, the time spent on the line and the number of product types available to fund on the line. You may have the ability to do third party origination’s (wholesale) and bulk loans on certain types of lines. This ability is very important to originators of Sub Prime product. Non-directed lines tend to operate more efficiently, although they may cost slightly more.

There are basically two types of Warehouse lines of credit; Affinity lines and Non direct lines. Affinity lines are essentially Warehouse programs that investors provide to their key originators. These Affinity lines provide for the funding of loans to that particular Investor and generally only a handful of other Investors. Affinity lines may have slightly lower costs and provide ways to pass on rebates. However, you may be limited to the product types allowed on the line and you may be required to place a certain percentage of business with the provider of the line or be subject to additional fees. You may be charged a premium if you are allowed to place other loans on your line to be sold to other Investors, which limits your flexibility. Most of these lines have a 1 to 5% haircut that requires you to have to come up with some of your own funds in order to close each loan.

What does it take to get a Warehouse line of credit?

The requirements for securing a Warehouse line are getting easier. Your volume, reputation, QC procedures and packaging abilities are becoming more important than your financial statement and net worth. You need to find a Warehouselineofcredit lender that gives you the best mix of options, costs, and execution. Consideration must be made for the documentation required to fund, the execution you get, and the product flexibility you receive, versus the line rates, transaction fees, wire fees, advance rates, the number of investors and program types you can fund on your new line.

What are the 10 most important questions I should ask prospective Warehouse Lenders?

1. Do I have to personally guarantee the line?
2. Do you have a haircut to fundings to the line?
3. Is this an Affinity or Non-directed line?
4. What is your minimum Net Worth requirements? Audited or Non-Audited?
5. What product types do you allow to be funded on the line? Any Investor limitations?
6. What documents do you require to fund a loan?
7. What are your line fees and transaction costs? Are they negotiable?
8. Do you allow third party (wholesale) origination’s to be funded on the line?
9. What kind of training do you offer? How will you help me get started?
10. Can I speak to someone currently using your Warehouse facility as a reference?

Is it really worth all the trouble?

There are many rewards for making this transaction into Mortgage Banking with a Warehouse line. First of all you get the satisfaction and esteem associated with being a Mortgage Banker. You have greater flexibility and more choices of where and who to sell loans to. You receive greater profits now that you get to keep all the administrative fees and service release premiums. Some Mortgage Brokers specializing in Sub-prime paper have been able to add several points to their bottom line once they make the move to Mortgage Banker using a Warehouse line. But the most important reason is control. You will control the closing process and not be at the mercy of the funding department of some larger Investor.

How do I get a Warehouse Line of credit?

There are over 30 institutions offering Warehouse lines of credit for Mortgage Brokers and Bankers. You should ask your wholesale reps, read industry periodicals, consult with industry professionals and search the Internet for viable choices. The road to finding and choosing the right Warehouse line of credit Lender has many twists and turns but if you are determined and prepared it has many benefits that can make the journey well worthwhile.