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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2005

Broker to Banker

A smooth transition starts with getting your house in order

r_2005-11_Davis_spotMaking the transition from mortgage broker to mortgage banker has its advantages. You can originate more loans because you will be selling loans on the secondary market. You have more control over your closings and can close loans in your own name, which extends your brand.

Becoming a banker, however, also involves a business-model shift. This requires thorough research and preparation to execute successfully. A large consideration, and the first decision you will make, is whether to establish a warehouse line of credit with a warehouse bank or a correspondent lender. Indeed, warehouse bankers and correspondents aren’t created equal, and your profitability and the service and support you receive can vary greatly depending on whom you choose as your partner.

For a smooth transition, there are a number of things to consider when choosing a warehouse banking partner or correspondent, from the warehouse line of credit to marketing support.

Position yourself

As a mortgage broker, your goal is to get every deal funded. If a loan goes bad, you are not penalized (short of fraud), so the objective is to keep production levels at a steady volume.

Mortgage bankers also want to get deals funded. Unlike brokers, they also have to consider the repurchase risk and contingent liability if the deal goes sour. This has a strong impact on if they choose to fund a loan; they don’t want one to come back to bite them.

For this reason, bankers consider several factors before they make a decision about whether to offer a company a warehouse line of credit. These factors include net worth, credit history, preparedness, experience, character and credibility.

When it comes to net worth, the higher your net worth, the more options you have regarding which investors you can sell to; the better the terms of a warehouse line; and the more money you can leverage. Typically, the amount you can leverage — or borrow — is a multiple of 15 or 20 times your net worth. For example, if your net worth is $100,000 and the ratio is 15-to-1, you can get a line of credit of $1.5 million. If your net worth is $500,000, your line of credit would be $7.5 million.

Short of raising additional capital, your net worth is what it is. But you can get your financial house in order before you make that first step. Hire a licensed certified public accountant with a mortgage-banking background to audit your financial statements and guide you through the transition. Some warehouse lenders also require current interim corporate financial statements, so you also should have those available.

You also must determine the category of mortgage banking in which you fit (Federal Housing Administration banker, nonprime lender, etc.). For example, a warehouse lender might acquire primarily high-quality nonconforming Alt-A mortgage loans — loans to borrowers with grade-A credit but high loan-to-value ratios or those who don’t meet certain documentation or verification requirements. This represents a growing segment of the population that includes small-business owners, retirees and the self-employed who do not document their income sources but are solid credit risks. Before selecting a lending category, ensure that you have buyers for your loans once they are closed.

Another need is an experienced team and back-office or outsourced support. Making a successful broker-to-banker transition will require a team of professionals with skills in operations, sales, loan originations, secondary market, underwriting and closing. Many warehouse lenders also require measurements for quality control.

•  •  •

Securing a warehouse line of credit is your first concern and the first decision you will make in your transition. Not all warehouse lines are created equal. Some are available at a higher or lower multiple to your net worth.

Look for a warehouse banker who lends at 15 to 20 times net worth. Also, be wary of the “haircut.” This is where many warehouse lenders want bankers to use a percentage of their own finances to fund loans as an added security.

There are numerous benefits in moving from mortgage broker to mortgage banker. Make sure you do your homework and choose the warehouse partner and correspondent lender that is right for you.


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