Choosing a bank
Now that you know what warehouse banks
will look for in your application, let’s discuss
what you should look for in a bank. Just like
borrowers, warehouse banks come in all sizes
and their lending capabilities can vary, so it is
important to know their limits.
When you’re just starting out with a warehouse line, you may find a better fit with a
smaller bank that has experience helping
originators become lenders or helping smaller
lenders grow their companies. As your business — and net worth — increases, a larger
warehouse bank may be better suited to help
you scale your business with a higher limit.
Rates, fees and everything in between also
will be important to growing your new lending business. Homebuyers often shop for the
best interest rates and the lowest fees, so you
should too. You should expect to pay prime
rate, or rates based on a common benchmark
like LIBOR, plus a margin on the line of credit.
Transaction fees also will apply. As you grow
and your volume increases, terms usually can
It’s also important to remember that not all
warehouse banks are created equal, especially
when it comes to nonagency lending, so it is
important to seek a qualified partner. Many
warehouse banks prefer to limit underwriting
to agency products (qualified mortgages, or
QM loans, through Fannie Mae and Freddie
Mac). If you’re hoping to originate non-QM or
jumbo loans on a warehouse line, make sure
your bank allows it first.
Another thing to consider as you make
your decision is that many warehouse banks
also purchase loans as correspondent investors. This arrangement can offer stability over
the life of the line, because mortgages have a
clear path from origination to final sale. This
arrangement may not allow as much room for
negotiation in the sales price, however.
Small lenders hoping to shop investors for
the highest profit need to have the ability to sell
loans to investors other than their warehouse
bank. Therefore, if you have preferred investors
outside of your warehouse bank, make sure
those investors are approved as a takeout on
the line. If they are not approved, ask how you
can get them approved. The investor will likely
have to supply proof of financial stability and
performance, and the bank also may request
product guidelines for review.
Once the investor is approved, your warehouse bank may require a copy of the investor’s
loan approval and/or lock for each transaction
put on the line. Selecting a warehouse bank
with a wide variety of approved takeout investors will increase your ability to maximize profitability, although extra work may be required
to ensure the warehouse bank approves of the
investors you plan to work with as you originate
mortgages on your warehouse line.
Respect the risk
A warehouse line can help you take your business to the next level by creating a “revolving
door” of credit on which to write mortgages.
This gives you the potential to sell loans for
higher profits, but you have to keep a healthy
respect for the risk.
Making the transition to a lender carries a
new set of requirements, from regulatory compliance to disclosures throughout the origination process. To paraphrase a well-known
saying, with great lending power comes great
Mistakes can be costly. If you write a loan
and find that you can’t sell it later, you are still
responsible for making the warehouse bank
whole. In extreme situations, lenders may
barely break even or take a loss by the time a
loan is off their line.
n n n
Warehouse lines tend to work best for originators with a lot of experience and discipline,
as well as a favorable net worth and plenty of
liquidity. Partnering with the right bank that
understands your business model, and is willing to work closely with you through the process, also is critical. If you’re ready to commit
to the responsibilities of obtaining a warehouse line, then you will have created the opportunity to reap very satisfying rewards. n
Jacqueline Ring is vice president of warehouse operations for Florida Capital Bank Mortgage. Over the
course of her 25-plus year career in the mortgage industry, including more than a decade with her current
company, Ring has acquired deep and nuanced expertise in analytics, policies, procedures and regulatory
compliance. She excels in managing complex projects, products and teams, while continuing to provide
exemplary customer service. Reach her at email@example.com.
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