Move from Libor Further Complicates Warehouse Funding Decisions

Disruptive Technology Can Optimize Complex Decisions

Michael McFadden, CFA, OptiFunder Founder & CEO

Key Ideas:  

• Libor used to dominate warehouse line Agreements.
• Warehouse line agreements now are referencing a wide array of interest rates.
• Diverse sets of reference rates provide optionality to the originator.
• Innovative decision engine simplifies complex funding decisions.

Mortgage lenders spent the last two years transitioning away from Libor. All new mortgage-backed securities issued by Fannie Mae® and Freddie Mac utilize SOFR. But while the GSEs have settled on one benchmark, the warehouse lenders offering short term financing have embraced a variety of new reference rates adding to the complexity of managing warehouse facilities for independent mortgage originators.

 As a platform for optimized funding decisions with relationships with over 60 warehouse lenders, OptiFunderSM is uniquely positioned to see what is emerging as the dominant benchmarks warehouse lenders are using. Review of recent OptiFunder platform transactions revealed warehouse lenders are utilizing five key indices including:

• SOFR or Secured Overnight Financing Rate which is based on transactions in the Treasury repurchase market, where investors offer banks overnight loans backed by their bond assets.
• AMERIBOR® created by the American Financial Exchange, it’s calculated as the transaction volume weighted average interest rate of the daily transactions in the AMERIBOR overnight unsecured loan market on the AFX.
• BSBY or Bloomberg Short-term Bank Yield Index provides a series of credit sensitive reference rates that incorporate bank credit spreads and defines a forward term structure.
• Prime largely determined by the federal funds rate.
• Note Rate with specific spreads.

The diverse sets of reference rates provide optionality to the originator as the reference rates don’t move in lockstep. The increase in rate variability, combined with other considerations for funding allocation, such as non-use fees, rebate incentives and even cash-in accounts, can make these crucial decisions even more complex. OptiFunder’s Warehouse Management System (WMS) utilizes AI, machine learning and data optimization science to improve and automate these complex decisions. Its optimized decision engine employs all three tools to evaluate across countless reference rates and deliver the result that achieves the desired outcome such as minimizing interest expense, maximizing ROE, or achieving certain funding allocation targets.

Additionally, OptiFunder’s Warehouse Management System provides real-time expense reporting and projections. For the first time, mortgage bankers have robust business insights available to compare costs across facilities and analyze the complete cost of capital—a valuable tool to combat shrinking Gain on Sale margins and evaluate any possible impacts of diverse benchmark rates on funding expense. In a contracting and changing marketplace, embracing innovative technology solutions can bring the agility needed to maximize operational efficiencies and reduce the cost of capital. Currently, OptiFunder is the only platform that provides the decision engine mortgage bankers need to optimize these new indices, see their financial impacts, and automate all funding and purchase advice processes.

  ***

As a former CFO of a publicly traded mortgage banker, I experienced the frustrations of managing the complex variables of mortgage funding.  I designed OptiFunder to create a better experience from funding through loan sale. Now, OptiFunder clients include many of the country’s top 100 mortgage lenders.  

Originators are faced with the need to cut cost in all areas of their business, and the change in indices creates another area where actual cost are hard to measure. Tools are needed to measure funding costs, haircuts, non-use fees, new product placement decisions as non-QM re-enters the market, gestation line use, and many other variables.

Technology is advancing in these areas and OptiFunder is helping lead the way with its focus on the funding process. All mortgage bankers will need to look at every solution they can in the coming year of contraction that is expected. 

Published by

OptiFunder

3,263 followers

Published • 1y