Converting from Mortgage Broker to Mortgage Banker

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Converting from Mortgage Broker to Mortgage
Banker

• Presented by Jason Mitchell

October 26, 2004
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Positives

• Ability to close loans in your own name
• Better execution price -- correspondent vs.
  broker
• Expanded investor base and product offerings
• Non-disclosure of yield spread premium
• Attract new loan officers
• Warehouse spread

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Warehouse Spread

• Warehouse Spread the difference between the
  Interest Earned on the loans in inventory and the
  Interest Paid on the borrowings used to fund
  those loans
• Positive vs. Negative Spread

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Negatives

• Additional overhead post closing, shipping, QC,
  underwriting, closing, document preparation
• Need to service first payment
• Repurchase risk from investors
• Secondary marketing/hedging of risks for pipeline
  and loans in warehouse

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Characteristics / Terms of Warehouse Line of
Credit

• Warehousing Credit Security Agreement
• Negotiable
• Size based upon production volume, average days
  in warehouse, and net worth
• Revolving
• Limited Term - usually One Year, Renewable
  Annually

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Sublimits / Other Loan Types

• Wet Settlements
• Seconds, Home Equity Loans/Lines
• A-, B, C Paper
• High LTV Loans
• Repurchased Loans
• Loans in Foreclosure

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Characteristics / Terms of Warehouse Line of
Credit

• Floating Rate
• Fees or Compensating Balances
• Commitment Fee, Nonuse Fee, Package Fee
• Secured by Mortgage Notes
• Discounted Advance Rate - Haircut
• Committed vs. Uncommitted
• Warehouse Periods
• Investors - Approval by the Lender

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Approval of Warehouse Line

• Assessment of Management
• Experience
• Background Checks
• References
• Dun Bradstreet Reports
• LexisNexis Reports
• MARI, Affinity
• Credit Report

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Approval of Warehouse Line

• Review of Operations
• Sources of Loan Originations
• Secondary Marketing and Coverage Policies
• Quality of Loan Inventory

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Approval of Warehouse Line

• Review of Servicing Portfolio
• Investors
• Geographic Distribution
• Delinquencies
• Valuation

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Approval of Warehouse Line

• Review of Financial Statements
• Income Statement - Profitability
• Balance Sheet - Composition of Assets, Amount and
  Type of Liabilities, Size of Net Worth
• Cash Flow/Liquidity
• Financial Ratios

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Financial Ratios

• Typical industry standard financial covenants
  include the following
• Tangible new worth (gt 1MM)
• Leverage (total debt to net worth lt 201)
• Liquidity (free cash)

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Final Comments

• Questions?