While advancements in mortgage technology have certainly improved the borrower’s experience, the most critical time for IMB’s is the time of warehouse funding. A borrower will remember if the wire doesn’t show up on time. Additionally, the longer it takes to turn the balance sheet over, the more impact it will have on the bottom line. Every day a loan sits on a warehouse line costs money. Even with all the advancements in the mortgage origination process, the funding process is still inefficient. From closing packages to managing warehouse lines, trailing docs and recordings to assignments and reconciliations, it’s a fragmented and reactive procedure that leads to revenue leakage.
Warehouse expense is often one of the largest expenses on an IMB’s P&L. The MBA’s Chief Economist reported IMBs spent an average of $1,344 on warehouse expense in Q4 2023. While technology has done much in terms of closing efficiency, IMBs are experiencing high costs and long dwell-times. Even though the borrower is signing papers in record time, the post-closing process is taking too long, costing IMBs on average $73.55 per loan per day.
Over the years, IMBs paid less attention to warehouse cost, likely because they had a positive carry. Due to today’s inverted yield curve, that is not the case for most. With high rates and low margins, IMBs need to find ways to run leaner and get the most out of their current resources. With warehouse expense and long dwell-times affecting the bottom line, the key is to maximize efficiency in the warehouse funding process. This can be achieved through automation.
1. Automate Warehouse Allocations and Decisioning Factors
Deciding the best way to distribute your loan pipeline across multiple warehouse partners for the best financial performance is impossible without technology. Good decisions are based on factors that are often interdependent and dynamic. Real-time data integrations enable intelligent decisions based on dynamic data.
The retirement of LIBOR has made managing warehouse lines more difficult. Warehouse lenders use a myriad of reference rates; the variance can be wide and change daily. The various benchmarks provide rate optionality and impact warehouse expense. In addition to reference rates, other factors can contribute to interest expenses such as fixed cost, funding fees, non-use fees, rebates/incentives, and more. Most originators have three or more warehouse relationships, and each warehouse applies different rates, fees, and incentives. The management of warehouse terms has become increasingly complex.
Instead of manually tracking the many factors, technology can play a significant role in managing these funding decisions, tracking daily reference rates, factoring fees, evaluating rebate incentives, and analyzing data. By using technology solutions to factor in the best warehouse decisions, IMBs have shown savings of 10% or more of warehouse expense.
2. Automate Funding through Loan Sale
Technology offers operational efficiency, which can affect warehouse costs. By reducing a few days of dwell time, you can effectively reduce your overall cost of warehouse. In this complex industry, there is little data integration or automation for warehouse, accounting, or loan sale tasks. Most IMBs are manually sending closing packages to settlement agents, requesting/verifying wire data information, receiving closing packages, shipping notes to doc custodians, tracking collateral status, requesting shipping to investors, receiving and reconciling purchase advises, requesting warehouse paydowns – each done differently for every originator, warehouse, and investor, using a variety of independent systems.
By using software to automate funding through loan sale activities like funding decision, sending wires, shipping collateral, and requesting paydowns, IMBs have proven to cut on average 2-4 days off dwell time. As IMBs are incurring interest expenses of $73 per loan per day, reducing 3 days of dwell time equates to savings of $220 per loan.
The most successful IMBs have embraced technology to streamline operations and reduce costs, but perhaps more importantly, to leverage data and insights. Software brings transparency to a once manual industry. By using technology, originators can track data, identify trends, uncover problems, measure productivity and KPIs, improve processes, reconcile expenses and PA’s more accurately and efficiently, and ultimately use this information to report back to stakeholders and build a scalable business model.
Strategic warehouse decisions are guided by market conditions. In times of high margins, the aim should be to minimize total dollars of expense. Alternatively in periods of low margins and shrinking pipelines, maximizing total Return on Equity should be the goal. Software solutions make it much easier to ensure you have flexibility to strategically optimize warehouse decisions based on market conditions, streamline operations, and improve profitability.