By McMahon, Michael P.
Journal of Commercial Lending , Vol. 75, No. 4
Commercial banks that lend to the mortgage banking industry usually have a specialized lending unit within their real estate or financial institutions divisions. These specialized units focus on providing mortgage warehouse lines of credit and other related credit products and on providing various mortgage custody and cash management products and services.
Role of the Mortgage Banker
Mortgage bankers, as distinct from mortgage brokers, are in the business of originating, processing, underwriting, closing, selling, and servicing mortgage loans. Mortgage brokers also originate and process mortgage loans, but they broker these loans and the associated servicing rights to mortgage bankers who complete the closing process.
Therefore, the primary difference between a mortgage banker and broker is servicing: The broker sells all loans on a servicing-released basis, while the banker generally retains the majority of the servicing rights on closed loans. Servicing is the principal reason the mortgage banker is in business. All the mortgage banker's activities are generally geared toward increasing the servicing portfolio to enhance the value of the company and stabilize long-term profitability.
Role of the Warehouse Lender
Mortgage bankers usually finance their mortgage origination activities by establishing revolving mortgage warehouse lines of credit with commercial banks. In addition, some companies augment their warehouse lines with loan repurchase facilities from mortgage security dealers, while also using early funding programs from Fannie Mae and Freddie Mac to increase inventory turnover and to reduce warehouse needs.
Two Approaches to Warehouse Lending
Commercial banks that provide mortgage warehouse lending can approach the business in two ways: as lenders and collateral custodians or as participants in a shared or syndicated credit in which one collateral custodian represents the bank group. One drawback of being a collateral custodian, however, should be noted: It requires significant investments in staff, systems, and space.
New lenders to the mortgage banking industry should consider initially participating in syndications to eliminate the substantial cost of establishing collateral processing units. In general, it is costly to process collateral for only a few warehouse lending relationships within a loan portfolio.
All warehouse lenders establish certain underwriting criteria that define their approaches to mortgage warehouse lending. For example, at First Interstate, all mortgage bankers must:
1. Reside in the region.
2. Have a minimum tangible net worth of $2 million.
3. Have a minimum servicing portfolio of $1 billion.
4. Have a strategic business plan that includes indications of growth in retained earnings and loan servicing.
5. Have the capability to produce monthly financial, production, and servicing reports and daily secondary marketing reports.
6. Have at least one other warehouse line of credit. This credit must be documented as a shared or syndicated credit with only one collateral custodian.
7. Have experienced, stable, and "known" management with adequate management depth.
While these factors are important, it should be emphasized that none of the first six can offset either unknown or questionable management.
When reviewing prospective clients' requests for warehouse lines of credit, the policy at First Interstate is to ask for:
* A minimum of three years' audited and company-prepared financial statements.
* Current and historical interim statements.
* Production volumes for each operating period.
* Audit letters from Fannie Mae, Freddie Mac, and Ginnie Mae.
* Servicing portfolio information regarding the types of loans serviced, geographical concentrations, recourse obligations, delinquency and foreclosure ratios, run-off rates, weighted-average coupon rates, principal and interest pass-through requirements, and a portfolio valuation (if available). …