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Completing The Transformation
From Broker To Mortgage Banker
Is this the right time for you to start on the road to
becoming a mortgage banker? A thoughtful measure of
the pros and cons will provide an answer.
BY WILLIAM L. BESCHEL
"Change alone is unchanging" (Heraclitus, Greek philosopher, 475 B.C.)
Nowhere has the notion of change been felt more dramatically than our industry's unprecedented dependence on the independent, autonomous mortgage originator as a source for mortgage product.
One very significant consequence of this recently formed dependence is that opportunities once reserved for a privileged few are now accessible to a far broader spectrum of the mortgage origination community than would have ever been thought possible only a few years ago.
An impressive example of this transformation is the ability of even modestly sized originators to achieve correspondent status - and the accompanying premiums - provided they have the means to fund and close loans in their own name.
As the traditional middle-market mortgage bankers have been either bought, merged or acquired by the large national conduits, warehouse lenders are keenly aware of the increasingly significant role that smaller, independent originators are playing in generating both commercial and residential mortgage loans.
Competition for warehouse outstandings is fierce and consequently, this long-neglected segment of the origination market has become the latest battleground for warehouse lenders. As the millennium approaches, increasing numbers of brokers are heeding the call and becoming bankers by obtaining warehouse lines of credit.
The purpose of this article is therefore to highlight the critical issues that should be given
consideration prior to making a decision to step from broker to banker. As a warehouse line is a pre-requisite to making this step it needs to deliver the benefits - as promised - once you sign on the dotted line.
Warehouse lenders are quick to point out the benefits of having a warehouse line and their
arguments are well-taken. First and foremost, a warehouse line gives the originator access to capital. And access to capital gives the originator control. Failure to close on time and as promised can have disastrous consequences in a market where the Internet mentality of faster, better, cheaper is becoming increasingly pervasive. It can also be the decisive selling point when soliciting builders, developers, realtors or top producing loan officers.
The economic argument is also straightforward: In a tough market the best execution is critical. Failure to achieve best execution means less profit is available to be reinvested in those necessities that will be required to successfully compete in the new millennia - resources like technology, back office efficiency, an Internet presence, advertising/marketing or an over-achieving sales staff.
As correspondent pricing schedules are typically more generous than the wholesale rate sheets, an originator is able to generate enhanced fee income on each loan transaction when operating as a mortgage banker as opposed to a mortgage broker.
Servicing retained
A warehouse line is also an essential pre-requisite for any mortgage banker wishing to either bundle or aggregate loan deliveries or retain servicing. By selling product servicing retained, the mortgage banker owns the annuity value of the servicing component of the future payment stream and, in an industry as cyclical as ours, this annuity income can go a long way in smoothing out cash flow swings during those periods when the phones have stopped ringing.
There is a cost, of course, to this annuity, and it is paid by foregoing the servicing released
premium that is typically received at the time of loan sale. This is an extremely important consideration as many mortgage bankers depend on this premium to cover current cash flow obligations.
Warehouse lenders correctly point out some additional, if more subtle, benefits. Certain
investors are increasingly demanding that originators deliver closed loans as a prerequisite to the continuation of a business relationship and some states require a warehouse line for specific licenses. Enhanced prestige with consumers, brokers, builders and developers is also cited as a tangible benefit. And for originators of residential mortgage loan products, less onerous disclosure requirements under RESPA are of no small importance.
While all of these benefits are undeniable, they are not always attainable. It is necessary for
anyone contemplating the step from broker to banker to walk before they run or a mistake will be made that will cost money. Potentially big money.
It is hard to get around that old truism that "Nothing is Free in America." Operating as a mortgage banker means additional opportunity, at a price. And that price is more than just the monetary cost of the rates, fees and charges imposed by the warehouse lender.
The correspondent pricing schedule is typically more generous because the originator is being paid to assume a higher degree of risk. Stated another way, the originator has stepped up and accepted a higher level of recourse on each loan delivered through the correspondent channel.
Focus on quality control
Prudence then dictates a renewed focus on internal quality control infrastructure and procedures to ensure that a rigorous front-end system catches and prevents problems before they become repurchases later down the road. It also follows that care should be taken as to which loans go on the warehouse line because an investor may refuse to purchase a loan which has not undergone proper quality control.
The result? Recourse risk for the correspondent is not only the threat of repurchase, but the
possibility that a loan is never purchased in the first place.
The expense associated with a vigorous QC effort is an example of infrastructure costs which must be incurred to ensure successful implementation of the warehouse facility.
Other costs may include the potential addition of staff to perform the shipping and funding
functions, insurance premiums for errors and omissions and fidelity coverage, audited financials and management information system upgrades.
In most instances staff training is also required as deeply entrenched operational procedures must often be modified to accommodate program requirements. All of these costs represent material expenses which need to be factored into the cost/benefit equation.
How to choose
The question as to which warehouse lender or program begs a strategic as opposed to a tactical decision. Pricing is certainly a material consideration, but the evaluation criteria needs to be more far reaching.
The real issue for any originator wishing to take their company to the next level is strategic
alliances. Consequently, the stability of the warehouse lender as a long-term, consistent funding source should be evaluated and considered.
Because of the inherent volatility of our industry, mortgage bankers are well advised to align themselves with a warehouse provider that is relational - as opposed to transactional - in orientation.
Murphy's Law still prevails, and it is at those times of market uncertainty when the performance of the warehouse lender is most critical.
An often overlooked but critically important component is the operational impact of the
warehouse program on the originator's back office. Warehouse programs are not all created equal and the demands on your processing staff can differ greatly. The expediency in which a warehouse lender can fund, ship, process payoffs, execute wires/checks and remedy exceptions and document deficiencies will directly impact cash flow.
Keep in mind that pricing is as much art as science or, in other words, while all warehouse
lenders have certain minimum pricing thresholds, flexibility should exist as to the individual rate and fee components.
This is very important because an originator's product profile may result in a financial structure that is far less impacted by changes in rates than fees (or vice versa). As production grows, the capital requirements to self-fund a portion of every loan can create a cash flow squeeze. It is therefore necessary to carefully consider how aggressively the warehouse lender will advance against any given loan.
The warehouse lender should also be entrepreneurial, innovative and creative, otherwise the
warehouse program you're locked into may not fit evolving market realities.
How can you tell? Probe for expertise in your core products and niches. Does the lender
understand your product profile? Does he grasp the nuances of your market niche? Is he comfortable with your origination channels; e.g. retail vs. wholesale? Has the lender approved those investors which are strategic buyers of your products? Keep in mind that innovation and flexibility often go together.
One of the biggest winners in the mortgage wars that emerged throughout the '90s is the independent mortgage originator. These companies have proved themselves adept at generating loans and capturing market share and are now expanding their perspective, their vision.
Becoming a mortgage banker is a natural progression. With this in mind, the decision to obtain a warehouse facility is strategic in nature and is also an essential prerequisite to become a full correspondent, bundle or aggregate loan deliveries or retain servicing.
Care must be taken however to measure - and manage - both the direct and indirect costs of the facility. Finally, a relational (as opposed to transactional) approach will pay long-term dividends when selecting a warehouse lender.
William L. Beschel is a principal of Warehousing Advisory Services Inc., a marketing and consulting firm with offices in Pasadena, Calif., Spokane, Wash. and South Miami, Fla. The firm specializes in arranging warehouse lines of credit for its clients and in developing brokers into bankers. He can be reached at (509) 448-3851.
This article was previously published in the May 2000 Issue of Commercial Mortgage Insight.
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