Comfort With Credit Risk Key for Players in the Space

Warehouse lending is becoming less popular with some of the big players who have provided it, but remaining and new market participants find it can be profitable if they can get comfortable with the credit.

Mark Hughes, vice president, due diligence solutions, at CoreLogic, told this publication warehouse lending today is attractive to providers both as a way to generate revenue and in terms of its ability to help companies build business relationships in line with long-term strategic goals. But it still tends to be done selectively as far as credit even though loans in the market generally tend to be high quality ones.

As industry risk management consultants such as Les Parker have noted in interviews with this publication, when many originators closed during the recent downturn, warehouse lenders found they had not been doing enough to protect themselves against credit, fraud and counterparty risk. As a result, warehouse lenders today remain much more mindful of these potential concerns.

In order to better manage such risks, warehouse lenders today continue to require originators “to do a variety of things” in regard to verification of credit. And the list could get even longer, Jonathan Corr, chief operating officer of industry technology vendor Ellie Mae, told this publication. With the Consumer Financial Protection Bureau getting into gear there will likely be even greater demand for credit quality measures this year, he added.

Increasingly both warehouse and correspondent lenders companies from early on in the process are working on perfecting processes aimed at credit risk management. Tools used to do so include third-party verification tests, document requirements, compliance/fraud screening and/or income verification. Tamper-proof electronic vaults also are used to ensure data integrity, said Corr.

Hughes said when it comes to third-party reviews most typically warehouse lenders working with his company pay a per-loan basis for an initial assessment of a sample of 100-200 randomly selected mortgages. The due diligence provider checks to see if the loans have required documentation and are in line with underwriting guidelines. Also reviewed is whether the loans comply with any anti-predatory lending/high-cost loan regulations. If there are no exceptions, or exceptions are minimal, originators generally get their lines.

There also generally are “spot checks” maybe on a six-month or quarterly basis going forward of smaller samples of randomly selected loans. Some warehouse lenders may also choose to outsource part or all of the operational review process for originators.

“Folks are interested in getting that transparency,” Corr said. “Everybody is extremely worried about buyback risk.

A minor mistake that has nothing to with intentional wrongdoing can trigger a buyback request in today’s market, he said. Even a clerical error or a loan “that is not perfectly pristine” can be a problem, said Corr.

This has led to a heavy workload that can involve a lot of staffing. Technology can help companies manage this, both in terms of the work itself and its price tag, he said.

“The cost of quality has gone up substantially,” said Corr, as there need to be multiple checks of many aspects of the loan throughout the supply chain.

Technology has been helping companies order information electronically as well as validate exceptions and bring them to users’ attention only when they have to be addressed. This helps companies verify information just once in the process whenever possible, with the aim of keeping cost down and velocity of the work up, he said.

Warehouse lending is “a very attractive business right now if it can be done efficiently,” he said.

“As the world is switching a bit from looking at making money on the interest rate” to a process that is “much more transactional,” there is an increasing focus turning the warehouse line quickly while still accomplishing all necessary credit reviews, said Corr. The fact that loan product remains largely homogeneous and has relatively low margins has been a catalyst for this trend, he said.

Technology can help turn lines more quickly while still keeping up with credit requirements. It does this by cascading specific warehouse lender and investor rules behind the scenes, Corr said. By electronically processing business rules that determine whether loans can move forward users can work more efficiently at the same time automated verifications and secure information portals address the business’ credit risk management needs. The fact that it is possible to collaborate on data on a real-time basis also helps users work more efficiently, said Corr.

Warehouse lenders and investors pay “modest transactional fees” to use automation that addresses these needs, he said.

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