[New] Getting A Warehouse Lender

Awarehouse lender looks at multiple metrics to determine whether or not someone is qualified for a warehouse line.

Unlike mortgage brokers, mortgage bankers do not have to disclose their fees or how much they make on each transaction because they use their own money to fund loans (their warehouse line). Thus, mortgage bankers can see substantially higher profits than they would with a broker compensation plan where the maximum is 2.75%. However, the higher the compensation, the higher the mortgage rates. As a result, mortgage bankers typically have higher rates and fees than brokers. Given the high interest rate environment we are now in, this channel may have some drawbacks.

“Typically warehouse lines are based on net worth,” Dre Roberts, senior vice president and national sales manager at Independent Financial says. “So we will leverage the net worth to 20 times. In the case of a non-delegated and a delegated, up to 15 times their net worth. We want to make sure there’s adequate liquidity to run the business, and we want to make sure that they’re profitable.”

Other questions that warehouse lenders consider are more instinctive, Roberts says. For example, do they have experience? Have they been a correspondent before? If they haven’t been a correspondent, do they have a

“As opposed to a broker that’s got a fixed compensation plan, when you move to delegated, you don’t have a fixed compensation plan as the owner of the company,” O’Dell says. “When you move to a true delegated relationship, you’re taking on a lot more risk. And, of course, you should get a bigger return on that from selling the loan from fee income and everything else.”

When a broker transitions into non-delegated and then delegated, the risk is in the disclosures, O’Dell explains. Are you disclosing that correctly or is a third party disclosing that correctly for you? Are you drawing the documents correctly?

“So if there was a mistake made on the debt ratio or the appraisal wasn’t scrutinized correctly you could have a loan that’s not sellable,” O’Dell says. “The lender would choose not to buy that loan based on the underwriting errors that happened on that. And then of course you have the same risk in terms of drawing documents that are compliant and match your underwriting approval.” mortgage DNA? Do they know how to originate? What resources are they going to use? What investors are they gonna sell to?

If a delegated or non-delegated loan is unsellable, it gets stuck on the warehouse line. When loans get stuck, the warehouse lender works with their client to get those loans moved off the line.

“So as far as getting the warehouse line, it can be an obstacle,” Roberts says. “Right now there’s excess liquidity in the market and excess warehouse capacity. So I think the warehouse lenders tend to be a little bit more lenient on the items that are subjective (experience, resources, investors). However, the tangible net worth liquidity, the profitability — those things are not as subjective.”

Certain warehouse lenders are gonna understand the needs of somebody transitioning from broker to banker, Roberts says. Some are more understanding of the fact that they’re not gonna know how to order a wire, they’re not gonna know how to calculate a wire, they’re not gonna know how to reconcile their loan. n

If you’re thinking of transitioning from mortgage broker to mortgage banker, the first thing to take into consideration is how many loans you’re closing, Roberts says. If a broker is a high producer, they may want to consider transitioning into a nondelegated with a correspondent lender. Typically, brokers move into non-delegated first because they can save expenses and reduce risks from outsourcing the underwriting process. Again, mortgage bankers charge higher interest rates because of fees and additional expenses, so the pricing needs to be competitive.

“Like if you’ve got a broker that’s looking to convert to a banker or a non-delegated correspondent, they’re looking for somebody that’s gonna help them and handhold them in the beginning,” O’Dell says. “So they might be a little less price sensitive and might be more interested in that personal relationship and being able to walk through loans, you know, a bigger lender out there definitely is more price driven.”

In terms of what technology a lender offers, it’s important but it does not weigh so much on the mortgage banker’s decision making, O’Dell says. Most lenders have pretty similar and pretty good technology right now. “It’s less of a factor than we used to talk about, you know, a few years back,” he added.

It’s important to note that just because you have an inhouse underwriter, does not mean they need to underwrite all the loans you bring in. For example, if your underwriter is not confident or qualified to handle Non-QM loans, a Non-QM lender that offers their programs through their correspondent channel can do them for you, and those loans could be non-delegated.

“You might have a lender that you send your non-QM product to that specializes or only does Non-QM product. You might have another lender that does HELOCs and you send that loan to them. You might have another lender that just does agency loans and so you’ll send those loans to them,” O’Dell says. “Typically most of our non-delegated correspondents, I would say, do business pretty regularly with two to four investors out there like me.”

The same is true with the delegated correspondents, Roberts says. The delegated correspondents need to have multiple channels to sell that loan to because they may, in some cases, not even have a lock in place until the loan’s ready to be delivered.

You need to be able to deliver it to multiple different investors and you have to underwrite it to the most stringent guidelines for all of them.

When transitioning from non-delegated to delegated, they again have to consider the costs of bringing on an in-house underwriter. According to Indeed, the national average salary is nearly $76,000.

“Are you doing enough loans and is there a big enough delta between the pricing of non-delegated and delegated for it to make sense for it to pay for itself?” Roberts says. “It can be an expense, it can be a profit center, or it could be break even. You do take additional costs on not only for the underwriting but compliance, et cetera. So that’s something you would want to sit down and do the math on before you make that transition.”

There are also certain times when the market makes it more or less favorable to go non-delegated or delegated. When origination volume is high, it’s more advantageous to go delegated. When volume is low, it’s better to go nondelegated.

“The busier it is, the higher demand for underwriting there is,” Roberts says. “It’s also harder for investors to retain the number of underwriters they need in order to handle volume. So they start stepping on the price, so to speak. They start ratcheting back the pricing of non- delegated loans, and improve the pricing for the delegated loans. This makes it more attractive to buy delegated loans. This way it doesn’t affect their underwriting capacity as much. Conversely, if you’re not dealing with a lot of volume, you would go for non-delegated.”

Roberts continued: “Right now the deltas between non delegated and delegated pricing is not very much. But back in 2020 when there was a shortage of underwriting, it was like 125 basis point difference. So it’s easier to make sense of making that transition then than it is now.”

As the MBA reported, loan origination volume is expected to drop even further in 2023, making non-delegated loans the better option. Margins have been shrinking in all channels across the industry, which happens when lenders are forced to lower mortgage rates to compete with other lenders in the market. This is due to lenders trying to grow volume through lower rates and using pricing opportunities to gain market share like UWM’s price war spawned by their “Game On” strategy.

In simple English, you can’t make as much on a loan now as you made back in 2020 or 2021. During times like this, it’s easier to stay a broker, However, you can use this downtime as an opportunity to upgrade to mortgage banking by becoming a non-delegated mortgage banker. Once volume picks up again, you will be ready to become a delegated mortgage banker.

“Make sure that you’re comfortable with whoever you’re dealing with,” O’Dell says as his last piece of advice. “Try to call them (the lender) a few times and make sure you can get them on the phone and they answer. Email them and ask them some of the deep questions. If you’re just talking to account executives, ask them something about drawing documents or ask them something about post-closing and see if they can answer that. Ask how long it takes them to get you that answer on things, because that’s what you really need. Once again, somebody that’s all encompassing and can help you when stuff goes wrong or coach you.” n