This week I attended the Western Secondary Market Conference sponsored by the California Mortgage Bankers Association. The conference is always held at the St. Francis Hotel in downtown San Francisco. I was only able to attend one day of the event, but from the chatter around hotel lobby, spirits were high and people were optimistic about the future of the industry. Mortgage companies, warehouse lenders and investors all seem to be encouraged by increased volume and profits through the first half 2010.
Most of my meetings were with warehouse lenders that are clients of Garrett, Watts & Co. We perform FOCIS Risk Reviews on new and existing customers of several warehouse lenders. A FOCIS report helps indentify risks of a mortgage banking operation and reviews many other operational aspects of a mortgage bank.
During my discussions with several of our warehouse lending clients, they discussed the key characteristics of their current customers and new prospects. Customer characteristics included items such as net worth, liquidity, production channels, minimum volumes, key financial ratios and secondary market delivery methods. Every warehouse lending we talked with was on the prowl to add customers. Our meetings this year were far different from last year when most warehouse lenders were frozen and unable to increase line facilities or add new customers. Today, they are not dealing with capital and liquidity issues as they were 12 months ago.
Let’s look at some of the key customer characteristics our warehouse clients believe are important to them today:
- Borrower Character: This has always been a key characteristic when lenders are reviewing and renewing warehouse line applicants. Because of the mortgage meltdown, there are many past owner/operators of mortgage banks that were forced to close down or ceased doing business. Any prospect that left a warehouse lender or investor with unfinished issues – losses on repurchases or unsold loans on a warehouse line – is probably not going to make it to first base. Even if a prospect has a lot capital and years of experience, leaving a trail of blood and carnage at a warehouse lender or investors indicates a character problem. Character issues are a show stopper for most warehouse lenders.
- Capital and Liquidity: Many warehouse lenders have increased capital and liquidity requirements to $1 million for most non-captive lines. Some of the larger correspondent investors provide warehouse lines with less capital / liquidity, but most of the originations funded through the warehouse facility must be sold to them.
- TPO Channel: The wholesale production channel is definitely out of favor for most warehouse lenders. They prefer a company that is focused on retail production with an emphasis on Realtor based originations. I couldn’t find any warehouse lenders that would provide a line to a new company focused on wholesale lending
- Mandatory Delivery: Most warehouse lenders will entertain a mortgage banker selling loans through mandatory delivery methods and actively managing their pipeline. There are a couple of caveats: First, they need to have an experience secondary market executive, not a lock desk coordinator managing interest rate risk; second, they need written secondary market policies, procedures, controls and reporting; and third, they need to engage one of the major hedging consultants that can provide the daily analytics on the hedged pipeline.
In conclusion, the conference spirit was good and warehouse lenders are actively looking for the right partners. Getting a warehouse line is doable as long as you have the key characteristics they are looking for.
