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The ability to fund mortgages drives your business, so evaluating your relationships with warehouse providers is essential to your strategy for growth. But what should you be looking for?
In our experience working with lenders of all sizes, we have identified six areas that should be analyzed for success:
1. Large line size allowances
Lenders need to evaluate where they want to be in two to three years and consider whether their current warehouse providers have the ability to meet that growth. Many warehouse lenders max out at $40 -$50million, so scaling could quickly become an issue if lenders aren’t looking forward.
For many lenders, the fix to the growth problem is simply to add more warehouse providers, but a larger network of providers can bring larger inefficiencies. Instead of using five or six different warehouse providers, scaling down to two or three who offer larger lines allows lenders to manage fewer bank relationships and possibly even reduce staffing as a result.
Although they offer larger allowances, syndicated lines come with their own set of challenges. If there are any problems in funding, mortgage lenders have to deal with each member of the syndicate individually for credit decisions, tying up more time and money. In the end, syndicated lines aren’t always a true solution.
2. Flexible collateral management capabilities
Collateral management is a complex process, especially in the face of constantly changing regulations. While some warehouse providers outsource all of their collateral management to one place, others have a full collateral management facility in-house. Which is better? The key here is flexibility, so lenders should look for warehouse providers who can do both.
A warehouse provider should have the technology and capability to manage collateral (if that’s what lenders want), but be able to consolidate this to one custodian if needed.
3. The right technology
Whether lenders are just starting out or stepping up to larger warehouse lines, evaluating a provider’s tech capabilities is key, both in the overall warehouse system and in wiring capabilities. Turn time is crucial to the funding process and providers should be able to fund late in the day. Lenders should ask whether the provider will fund up to 5 or 5:30 pm EST, and how fast the provider can turn it all around.
Another helpful indicator of technological prowess is the provider’s choice of software solutions. Lenders should look for a web-based system that can meet multiple intra-day funding demands while still meeting regulatory requirements. Warehouse line providers are tied into accounting and wire systems from a number of banks, so a provider who hasn’t invested in top-of-the-line software will have a hard time delivering what lenders need at the speed they need it.
Lenders who work with smaller or mid-size providers who subcontract wires out to large money center banks are often being set up as second-class citizens when it comes to getting wires out. Instead, lenders need a provider who can provide direct, robust wire capability.
4. An experienced and resilient management team
It pays to do business with a team that has broad experience and strong connections to other people in the industry. Warehouse providers with this kind of knowledgeable team are invaluable when problems arise, since they can size up the severity of the situation and not overreact.
Even more important, a warehouse provider with deep ties to the industry can help lenders when they are faced with a serious issue. For instance, in one case with a client who had a regulatory finding, our team at EverBank was able to help that client find a great solution. With our expertise and industry contacts, we were able to help the lender get over this hurdle and mitigate the impact of the regulatory action.
5. A commitment to the mortgage industry
Providing warehouse credit is easy when times are good, but what happens when things get tough? Lenders need relationships with warehouse providers who are committed to the mortgage industry for the long haul and want to build real relationships.
Mortgages should be a core business for the warehouse provider, or lenders might find they are left at the altar when they need funding the most. Large Wall Street investment banks, for instance, can be an important part of a lender’s warehouse funding strategy, but relying too much on these types of institutions can leave lenders vulnerable when the market shifts.
6. An array of product offerings
Lenders need a warehouse provider who not only provides funding for what they’re doing today, but also fits what they are planning for the future in new product areas. Do they offer funding for MSR, HECM, 203K and other FHA products? What about non-QM programs? Working with a warehouse provider who already funds in these areas will save lenders time as they expand their business.
The best warehouse providers don’t just carry out a series of transactions but forge a true relationship with lenders. That relationship, combined with the six elements outlined above, create a stable foundation for lenders to grow and thrive, even in a constantly changing mortgage environment.
