If you prepare for them, small banks can be your new source for warehouse deals

David E. Frase, executive vice president, Southwest Securities FSB

As published in Scotsman Guide's Residential Edition, December 2007.

Throughout 2007, mortgage bankers felt the effects of a changing warehouse market. Many large warehouse lenders suddenly restricted products, reduced advanced rates or even terminated their facilities with virtually no warning. Others began to transition customers into their bank holding companies so they could access the Federal Home Loan Bank.

For those still looking for warehouse funding, however, some options remain. A number of small warehouse lenders have shed their broker-to-banker images and are quickly absorbing the lenders abandoned by larger banks. Originators switching to these small programs should be prepared for heavier documentation requirements, larger consequences for bad loans and more-personal lending processes. But they also can look forward to renewed business.

More-detailed process

Small banks look at warehousing differently than their giant cousins, and putting together a warehouse deal with a small bank may be a more-detailed process than many mortgage bankers are used to.

Lower-capitalized banks book their warehouse funding as purchased assets, instead of as advances against commercial lines of credit, as a way to get around their legal-lending-limit constraints. These lines are called purchase/repurchase facilities. Each advance is booked separately in a warehouse's system as individual residential loans.

To do this, banks must declare the homebuyers to be their official primary source of repayment, instead of the mortgage companies. A regulation from the Office of the Comptroller of the Currency requires a bank officer to certify this fact within every loan file.

Regulators also require the bank to demonstrate independent underwriting on each file, so originators must provide the appraisal, loan application, credit report and a rate lock before funding. To ease this process, many small banks now use online systems.

Despite this potential re-underwriting headache, most small-bank programs are engineered to disburse in a couple of hours.

Small banks also are usually more aggressive in demanding repurchase or curtailment when a loan becomes stale. They often do not have the capacity or desire to offer repurchase lines and cannot play with yield-versus-losses as a large bank might. One or two bad loans can wipe out an entire month's net income, and a few more bad loans can shorten a banker's career.

These smaller banks also are not fans of interest-rate risk, and this has helped many survive the recent meltdown.

Relationship-based lending

Small banks are accustomed to knowing their customers. Representatives will keep in touch quite a bit to get a feel for this new relationship. While this process can be quite pleasant, make no mistake about its intention -- these banks want to know if you will run or hide when a problem arises.

The fastest way to sour relationships with small bankers is to avoid them when you have problems. They can offend easily and can make rash judgments.

The upside to this, however, is that small bankers have more authority to grant exceptions when needed. These banks often have a flat organization chart to help make quick decisions when they value their relationship with you.

To start building these relationships, look for small warehouse lenders in various publications, at trade shows and within your local professional organizations.

Some of these banks will eventually grow up and join the major players. But for now, they remain as small and charming as bed-and-breakfasts. Most important, they are absolutely open for business.

David E. Frase is executive vice president of Southwest Securities FSB, a national warehouse program in Arlington, Texas. Frase also is a director of the Texas Mortgage Bankers Association and a master certified mortgage banker. Contact him at david.frase@swst.com or (888) 477-3098 or through his company's Web site, www.southwestsecuritiesfsb.com.