A little over 20 years ago I started a mortgage bank with several seasoned mortgage professionals.  We found an equity partner (a commercial bank) and began the process of obtaining investor approvals and warehouse lines.  Our bank partner was not interested in providing us with a warehouse line.  The product we sought to originate two decades ago was no different the product most bankers are originating today -- conforming GSE and FHA/VA loan paper.  We obtained HUD, FNMA and FHLMC approvals and secured a warehouse facility.  Within four months we were originating, closing, selling and servicing loans. 

While the products are essentially the same, there are some distinct differences today when it comes to operating a mortgage bank today...

First, we securitized all products and retained the servicing.  Today, most mortgage bankers sell their loans to the large conduits servicing release. Second, we had to manually underwrite loans because DU/LP had not been fully launched. Third, our warehouse lender did not perform a credit review on our warehouse line advances.  The warehouse lender did require the note, but our advances were based on the credit of our company, not the credit of our loans. That last observation is causing some "issues" in today's lending environment...

Over the last 10+ years, more and more warehouse lenders have moved toward requiring loan level reviews of collateral before they will approve funding advances.  They still do a credit review of the mortgage banker, but much of the risk management is focused on quality and salability of the loan.   Some of this stems from loans warehouse lenders had to deal with during the subprime, alt-A and stated income era as many mortgage bankers got caught with unsalable loans when liquidity for those products became scarce.  As a result, many of these unsaleable loans ended up as a warehouse lender portfolio loan. In addition, net worth requirements dropped to as low as $100K.  Without much net worth or liquidity, warehouse lenders had to review the loans before funding.  Can you imagine operating a mortgage bank and originating $5M a month on $100K net worth?

These industry evolutions only cemented the growing requirement for loan level reviews of collateral before warehouse lenders would release advances on funding. The problem with this: Extensive loan level credit reviews by warehouse lenders can create delays in funding and increase operational costs to the mortgage banker. Essentially, the mortgage banker is selling a loan to two investors.

While loan level review requirements have undoubtedly delayed loan processing and funding turn times recently, we have seen some warehouse lenders implementing strategies to speed up the review process. Many lenders today are investing in technology to perform most if not all of the loan level review.  Data and documents are uploaded to warehouse lenders and loan level review can be as little 3-5 minutes. Plus there appears to be much more emphasis on the credit and character of the mortgage banker today than 2-3 years ago.  Net worth, liquidity, profitability, experience and internal controls are becoming the new drivers over extensive loan level review.  In addition, some warehouse lenders are requiring additional security in the form of restricted CDs and pledge accounts. That way, if there happens to be a loan level issue, there is cash available to quickly offset losses.

Warehouse lending is morphing once again.