After my initial post on warehouse lines Ralph Rosynek, President of 1st Reverse Financial Services gave me some feedback on his thoughts about using a warehouse line to fund reverse mortgage production. Below is a summary of the conversation.
Ralph, would you recommend brokers to utilize a warehouse line for their reverse mortgage production?
The use of a warehouse line for funding purposes on a reverse mortgage transaction is, in my estimation, a most dangerous activity for all but a few.
Generally, the delivery of a whole loan requires a Correspondent staff HECM DE to have underwritten the package as the “Lender” and also conduct the insuring activity. The Correspondent must then rep and warrant to the end investor that the loan is insurable for purchase activity. The whole loan delivery requires the mutual establishment of an authorized principal agent relationship – therefore net worth, expertise, and the internal controls of the Correspondent Lender become critical in evaluating the whole loan and related risk by the end investor. Lastly, the penalties for non-purchase are even greater in scope when using a traditional warehouse line as generally only a HUD approved lender/servicer is authorized to service a reverse mortgage transaction and many of the providers of warehouse facilities, bailees and custodians are unable to hold/service these loans as they are not HUD approved.
The majority of mortgage brokers act as a sponsored Loan Correspondent and do not have the ability to underwrite the package. Therefore they are pre-cluded from providing the representations and warrants required in a whole loan delivery transaction.
So you are saying that it can be more difficult to sell a FHA loan that was rejected by the lender vs. a conventional loan?
Depending upon the fault for non-insurability – the ability to move a stale item from the warehouse line may be difficult – this is further complicated by a short list of purchasers who might buy it if the first presented lender declines.
What kind of volume do you think is needed in order to successfully utilize a warehouse line for reverse mortgage production?
Currently, there are very few sizeable reverse mortgage lenders (all of which are in the top 100 of approximately 1800-2000 HECM Activity Report Lenders) that would actually benefit from the pennies saved in a warehouse transaction for a 4-6 loan per month volume versus perhaps going out of business in having to buyback one or two of the loans that were not insurable.
Lastly, I believe, unless the total focus of the company is on reverse mortgages and you are successfully executing a minimum of 25 per month I feel you are focusing on the wrong part of the business strategy by looking at execution as an issue.
Is there any sort of advice you might give to a broker who is looking to get into funding their own reverse mortgage production?
My advice in general when it comes to taking the warehouse step is to first speak with your end Lender, explain you need an additional $50 to $100 per transaction and work out an enhanced volume fee arrangement until the market is more settled with a greater opportunity to execute – and when you ask be prepared to take on all of the risk for the $50 to $100 extra just as you would if you did use the warehouse line.
As always, feel free to leave responses or comments by posting a comment below.