Mortgage Warehouse Lines
I am currently in the process of obtaining warehouse lines for my start-up mortgage banking firm. After 10 years in the industry this turned out to be a much more daunting task than I would have imagined.
I have perfect credit and what I would consider a high net worth for a start up company, but in today’s mortgage market warehouse lines are harder than ever to come by. Experience isn’t an issue, my D.E. underwriters both have over 15 years of experience and the rest of my staff all have 10 - 20. Twelve months ago I would have had banks lining up to give me warehouse lines, but instead I get to be nervous for the first time in my life about being approved for something.
First I want to talk about what I think caused this situation. Obviously the mortgage melt down, but there is a lot more to it or more I guess of the backlash that it created. Just like anything in this world its all about supply and demand. Now that mortgages are considered a much higher risk, and many warehouse lenders were put out of business by bad paper left to them by failing mortgage companies - there are not as many players in the warehouse space.
I recently attended a conference where a panel of warehouse lenders described the state of the market very well. They have gone from begging for business to being begged for lines. They have been flooded with applications and empowered to be much more conservative while maintaining acceptable amounts of business.
The upside to this whole process is I have learned more about warehouse credit policy than I ever cared to know, and what better to do with this knowledge than share it with the world here.
So here are Robert Palmer’s tips to warehouse approval:
Mortgage Warehouse Line Approval Tip #1 - Understand your Financials! The single most important thing to your warehouse banker is your CURRENT RATIO or WORKING CAPITAL. Both of these figures are based on two very important lines on your balance sheet CURRENT ASSETS and CURRENT LIABILITIES. These concepts are so important that I am not going to address them here, but dedicate a separate article to them - Understanding and Controlling Current Assets and Liabilities.
In any case your Current Ratio is calculated by dividing your current assets by your current liabilities, this also may be called a Quick Ratio (Technically the Quick Ratio is Current Assets minus Inventory divided by Liabilities, however start up mortgage companies don’t have inventory so the two are the same). Most lenders are looking for 1.2% or higher.
Working Capital is your Current Assets minus Current Liabilities, again the current liabilities are so important here. You look at your cash position and you have $200,000 but if you have current liabilities of $150,000 then your working capital is reduced to $50,000. To better understand how to control your current liabilities you can check out Making Wise Decisions to Control Current Liabilities in Mortgage Banking. If you do not have a bare minimum of $100,000 in working capital warehouse lines are going to be out of reach. All the cash in the world doesn’t help if your current liabilities eat it all up when calculating working capital.
Mortgage Warehouse Line Approval Tip #2 - Get an Introduction To The Warehouse Banker. Go through your entire Rolodex of colleges, contacts, associates, friends, priest, dentist… whatever and find SOMEONE who can introduce you to a warehouse lender. Cold calling for a warehouse line gets you off on the wrong foot and can hinder your ability to get approved. Your best bets will be correspondent lending account executives, mortgage insurance account executive and executives at other mortgage banking firms. If one of them can make the introduction it will help.
Mortgage Warehouse Line Approval Tip #3 - What came first the Chicken or the Egg? Getting a warehouse line has reminded me of this old riddle. In this case we have three things that all hinge on each other - Correspondent Investor Approval, Mortgage Insurance Master Policy Approval, and Warehouse Approval. Your warehouse banks want you to have correspondent relationships in place so they know they aren’t wasting their time approving you if no one will buy your loans, your investors want you to have your warehouse lines in place before they will approve you so you can actually do business with them, and they both want you to have a Mortgage Insurance Master Policy Approval - and the Mortgage Insurance Company will want to check Investor and Warehouse Relationships before they will approve you for a master policy!
You need to find a few correspondent investors who will approve you before you have your warehouse lines and you need to work with the M.I. companies to try and get Master Policy approval as early as possible. This is where you have to work your past relationships to try and get the rules bent to get the first approval. The first one from any of these three approvals is the toughest to get.
Mortgage Warehouse Line Approval Tip #4 - Get FHA Approved. This is such an in depth topic I have dedicated an entire article to FHA Approval and the FHA Approval Process. In today’s market this is a very important tool to have in your arsenal and it shows your warehouse banks you are for real. There is a caveat in that you need a warehouse line to get approved as a full eagle… there is a work around and you could always start our as a FHA Loan Correspondent instead of a Mortgagee.
Mortgage Warehouse Line Approval Tip #5 - Interview Your Banker Don’t get so caught up in trying to get approved that you don’t interview them. This is one of the most important relationships a mortgage banker can have, make sure you have similar values, goals, and can form a good working relationships with your warehouse lender. You need to have a relationship with your warehouse lender, not just an approval.