Assessing Risk on Mortgage Warehouse Lending
Why assess the risk? A bank normally holds a loan in its warehouse for no more than 90 days to complete documentation, processing, and sale. Some types of loans are held longer, such as lower volume products that take longer to amass for effective economic delivery and loans being accumulated under special investor delivery programs. Overall warehouse turn rates (average days in the warehouse) normally range from 35 to 45 days. While in the warehouse, the bank earns net interest income on the spread between the coupon rates on the loans and the cost of funding the warehouse. If the loan is maintained in the warehouse longer than originally expected at the time the rate lock was granted, some of the net interest income will be offset by the cost of maintaining a hedge on the loan.
Banks must have adequate systems to value their warehouse loans. Management must support its estimate of the value of these loans with objective evidence and adequate documentation. Loans remaining in the warehouse for longer time frames may reflect documentation or other salability problems, such as underwriting deficiencies, delinquency, or significantly below market interest rates. The valuation of such loans should take into account these salability problems. Management should take appropriate action to ensure that the level of longer-term warehouse holdings is kept to a minimum and accounted for in accordance with generally accepted accounting principles (GAAP). Bank reports should quantify and track the number, dollar volume, aging, and reasons for longer-term warehouse holdings. If the bank no longer intends to sell a loan in the warehouse, the loan should be transferred to the bank’s permanent loan portfolio. Bank management should employ a formal, disciplined method for transferring such loans out of the warehouse. This transfer must be recorded according to GAAP, with consideration given to any salability problems.
Who should assess the risks? Mortgage Credit Administrator, Chief Credit Administrator, Chief Lending Officer, Chief Financial Officer
How to assess the risk: Rate the KRIs to determine if a threat would successfully exploit a vulnerability and to justify expenditures to implement countermeasures to protect the bank’s assets or reputation. Use the “Focus Risk Assessment” tool for in-depth analysis of risks and mitigation techniques.
References & Links:
OCC Mortgage Handbook