Warehouse expense is often one of the largest expenses on an IMB’s P&L. The MBA’s Chief Economist recently reported the typical lender lost $1972 per loan for Q1 2023. No matter the environment, reducing expenses is key to maximizing profitability.
Managing a Complicated Expense
Funding decisions, deciding the best way to allocate your loan pipeline across multiple warehouse partners, are incredibly complex. Good decisions are based on factors that are frequently interdependent and dynamic. Real-time data integrations enable intelligent decisions based on dynamic data. Typically, IMBs have 1:1 integrations with warehouse lenders, hindering competitive expense analysis and Funders often lack visibility into dynamic pipeline factors that impact decisions.
Strategic warehouse decisions are guided by market conditions. In times of high margins, the objective 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.
Ensure you have flexibility to strategically optimize warehouse decisions based on market conditions.
Warehouse Expense Factors
Here’s an example of a basic calculation using SOFR plus 2.00% and 20-day dwell on a $350K mortgage: 350,000x (.0506 + .02) x 20/360 = $1,372.78 ($68.63 per day)
With a funding fee, That’s over $1400 per loan (40bps) of Interest Expense.
Plus, there are many other financial considerations including: Cash-in programs, aged fees, rebates, spreads, non-use fees, advance rates, fixed costs and reference rates…which became more complicated in 2022.
Reference Rates Vary
The retirement of LIBOR has made managing warehouse lines much more difficult. Warehouse lenders utilize myriad reference rates. We track ≈20 benchmark variations in our platform. The variance can be wide and should be tracked daily.
The various benchmarks provide rate optionality and impact warehouse expense.
Dwell Time Matters
Using the example above, removing 2 days of dwell creates a very attractive ROI/ROE: $68.63 x 2 = $137.26. It also requires 10% less equity to finance the Loans Held for Sale. Assuming $250mm per month & 2% haircut, that is $500k of additional liquidity.
For tips on reducing dwell time, please contact us.
OptiFunder's Top Tips for Reducing Warehouse Expense
- Keep your best warehouses full.
- Align incentives.
- If you have a non-use fee, require a rebate.
- Right-size capacity in all environments.
- Be mindful of your fluctuating pipeline.
- Diversify warehouse terms (at least reference rates).
- Paydown lines same day the investor wire is received.
- Monitor changes in reference rate DAILY.
- Don’t request advances any earlier than necessary.
- Calculate if maximizing rebates is your best strategy.
- Evaluate non-use fees; they may be worth paying.
- Minimize the cost of execution.
OptiFunder was founded to help mortgage banker CFO’s gain more insight into—and control over—their warehouse funding expense. We are happy to discuss these strategies and the savings you can achieve via automation of processes for funding through loan sale. For more information, please contact us at [email protected].
Chief Revenue Officer
Jon Rutila, CMB, leads sales and marketing functions for OptiFunder, a mortgage tech firm providing the industry’s only Warehouse Management System which facilitates money-saving transactions for IMBs and their partners. Rutila has more than 20 years of experience in mortgage lending and mortgage technology solutions.