Zombie Mortgage – Dead Man Walking
A warning to Mortgage Company Branch Managers...
Zombie mortgage company has a liquidity crisis limiting the funding of new loans because the warehouse line lender reduced or cut funding, but the branches don't know about it yet...
A mortgage company that runs out of money because of ongoing losses might create delayed loan funding or lose the ability to fund loans because there’s no money.
This is the Zombie bite, also known as a liquidity crisis.
A mortgage company with a liquidity crisis typically will delay funding and could miss a payroll. Once the branches learn that warehouse funding got cut or pulled, the vortex of death begins as the branches leave because of the weakness from insufficient cash.
But where can a branch go that is safe? This is the critical question.
Mortgage companies are not banks with customer checking accounts and a big vault filled with currency. Mortgage companies must get money to fund loans from an FDIC commercial bank through a credit facility known as a warehouse line of credit. Federal and state regulators examine FDIC banks. And unlike at SVB, warehouse lender banks must follow strict lending and risk management rules. These rules limit the amount of a funding line they are allowed to offer to a mortgage company to fund loans.
This funding limit is based on the mortgage company's net worth and bank account balances. A mortgage lender with a $100 million warehouse line usually must have $6.6 million in net worth and $5.3 million in deposits at banks. The math is based on 15X leverage and 80% liquidity.
If cash drops from $5.3 to $3.0 million, the warehouse line will drop to around $56 million down from $100 million. Is this lower borrowing limit enough to fund all loans? This is the question all branch managers should ask.
All FHA-approved mortgage lenders must submit a CPA audit to HUD each year, usually by March 31st. This audit must also be delivered to the FDIC bank warehouse lenders. The CPA audit will show how much net worth and cash is left.
When the FDIC warehouse banks get the financials that shows low cash, they are forced to act and cut or terminate the warehouse line. The financials are released monthly and quarterly.
There are a lot of mortgage companies promising branches big money to come over. But the company could already be The Walking Dead. Originators should consider funding failure risk when considering offers. Ideally, verify cash before moving.
Beware of the Walking Dead. Get a copy of the CPA audit or the bank statement to know for sure.
PS… Calculating the liquidity limit can be complicated.
PPS… The actual liquidity requirement is presented in different ways.
PPPS... Ask your CFO to show you the liquidity requirement.
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