Commercial

Will a Natural Disaster Wipe Out Your Mortgage Bank?

Aug 31, 2018

Coverage of wildfires, floods, hurricanes, and other natural disasters often dominates the evening news and social media. In addition to the overwhelming human tragedy, these natural disasters deal an economic blow to GDP, tourism, employment, housing, and business. Even industries located beyond the reach of flood waters or the flames of fire are affected.

It bears asking: Is your mortgage bank ready to cope with the far-reaching effects of a natural disaster?

Mortgage bankers encounter unique complications when dealing with natural disasters.

The ideal time to develop strategies to minimize the impact to profits is before a natural disaster occurs.

The Effect of Natural Disasters on Mortgage Rates

Although interest rates are a key factor in mortgage banking, concern over rate increases after a natural disaster seem unfounded. At a fundamental level, mortgage rates are determined by the supply and demand for money. The Federal Reserve (Fed) indirectly influences rates by adjusting the supply of money. The Fed increases the money supply, and interest rates decrease. Conversely, the Fed decreases the money supply, and interest rates increase. Although there are other factors that influence mortgage rates, the impact of a natural disaster is minimal.

Instead, the major concerns for mortgage bankers are centered on loan pipelines, fundings, warehouse credit lines, and associated fees.

How Natural Disasters Affect a Mortgage Banker’s Pipeline

A natural disaster can significantly impact a loan pipeline regardless of where the bank is located. In today’s economy, mortgage bankers do business across the country, and their pipelines include loans for properties in many states. After a natural disaster, a mortgage banker may have to make the difficult decision to freeze the funding of certain loans, or the entire pipeline, until property statuses can be confirmed. This delay in funding loans reduces the income earned through loan origination. In addition, the property status of funded loans may need to be verified before they can be sold. Based on credit line limits, the inability to sell funded loans to an investor can inhibit the mortgage banker’s capacity to accept new loans.

fire burning on a tree covered hill

Disaster Area Inspection Report

A Disaster Area Inspection Report (DAIR) is required for properties recently appraised in areas where FEMA has declared a disaster. Appraisers aren’t allowed into disaster areas until the areas are determined to be safe. Mortgage bankers need to be aware that it may take time for a property to be inspected and plan accordingly. If there are a significant number of properties affected by the disaster, there can be additional delays in scheduling an appraisal due to the high volume of reports needed.

Funded Loans Secured by Damaged Properties

If a mortgage secured by a damaged property has been funded, the mortgage banker won’t be able to sell the loan. Instead, they have to pay off the loan and keep it on their balance sheet or negotiate extending terms to allow the additional time needed for the property to be repaired and appraised and the loan then sold. Also, it’s not uncommon after a disaster for borrowers to be financially strapped and unable to make their monthly mortgage payments. For this reason, some bankers make the decision to defer mortgage payments for the affected loans they own until a settlement is reached with the insurance company.

Backlog of Unfunded Loans in the Pipeline

If mortgage bankers determine it’s prudent for them to stop the funding of loans in a disaster area, the decision can create a backlog in their pipeline, reduce fee income, and eat away at their credit line amount. A substantial delay in funding loans can have a significant effect on a mortgage banker’s profit for the month or an entire year.

However, some of the effects of a natural disaster can be minimized by working with a warehouse lender that offers some flexibility when it comes to fundings, credit lines, and fees.

Review Your Master Repurchase Agreement

A first step to being prepared is a review of the Master Repurchase Agreement signed with each warehouse lender. The agreement provides the guidelines regarding the mortgage banker’s responsibility for the loans generated and placed on the warehouse line. Most Master Repurchase Agreements have similar guidelines when it comes to funding responsibilities, credit line limits, and inspection reports.

Evaluate Your Warehouse Lenders

In general, mortgage bankers work with at least two warehouse lenders to avoid counter party risk. Although most Master Repurchase Agreements have similar terms, and many warehouse lenders operate under rigid guidelines, a few may offer some flexibility when it comes to dealing with the effects of a natural disaster. Mortgage bankers should take the opportunity to contact each of their lenders and discuss what options may be available during a business slowdown. They should also keep in mind that a lender is more inclined to offer options to bankers who have established strong working relationships.

In the event of a natural disaster, a warehouse lender that offers some flexibility could mean the difference between a slight slowdown or a significant drop in income.

Benefits Offered by Flexible Warehouse Lenders

Warehouse lenders who are focused on customer support and building strong partnerships with their clients are often willing to work with mortgage bankers during difficult times. To lessen the impact of a natural disaster, a warehouse lender may be able to offer a mortgage banker assistance in the following ways:

Extended dwell time
Negotiated or waived aged loan fees
Non-usage fee waiver
Bulge or temporary line increase

Extended Dwell Time

Dwell time, the duration that loans are held on a warehouse credit line, is generally between 15 and 30 days. Because warehouse lenders limit the amount of dwell time a loan can be on the warehouse line, a mortgage banker may be forced to buy mortgages off the line.

After a natural disaster, properties will need to be inspected for damage, and a rigid dwell time may force a mortgage banker to buy mortgages off the line for properties that haven’t been damaged. To avoid this situation, some warehouse lenders will consider offering extended dwell time. With this additional time, the mortgage banker may be able to determine the status of the property and avoid buying a note that can instead be sold to an investor.

Waived or Reduced Aged Loan Fees

Because warehouse lenders generally charge aged loan fees when a closed loan is not delivered or sold to an investor in a set number of days, operating delays caused by a natural disaster can rack up expenses. Widespread power outages, the necessity for worksite repairs and the irregular availability of personnel can all contribute to this fee.

Some warehouse lenders may be open to discussing these fees when they are related to a natural disaster.

If a mortgage banker has a good relationship with a warehouse lender, the banker may be able to negotiate extensions or even have the fees waived for a short period of time.

Non-Usage Fee Waiver

Many warehouse lenders charge non-usage fees if the mortgage banker is not using their warehouse credit line. When a mortgage banker’s actual physical site has been impacted by a natural disaster, time may be needed to get the business operational again before utilizing the credit line. There could be a short delay while power is restored and roads are cleared. Or the delay could be significant if it involves a move to a new location.

A few warehouse lenders may consider waiving the non-usage fee to allow the mortgage banker the time needed to get new loans in the pipeline. Consideration will likely be given based on past funding history, years of association, and the relationship between the warehouse lender and the mortgage banker.

Bulge Line

A Bulge or temporary line increase allows a mortgage banker to get an advance beyond their Committed Line of credit. The approval for this advance is at the sole discretion of the warehouse lender and can be for a limited duration.

A Bulge Line can be a real benefit to a mortgage banker when waiting for inspection reports for loans in the pipeline. Without it, the mortgage banker may need to temporarily stop accepting new mortgage applications. If a mortgage banker doesn’t have the capacity to put new loans into the pipeline, profits in the coming months may be severely impacted.

Natural disasters can’t be prevented, but strategies can be developed to anticipate and deal with their impact.

Understanding the obstacles that may arise when it comes to funding, selling, and generating new loans is key to developing tactics to meet these challenges. Establishing a strong partnership with a warehouse lender who can offer flexibility and options can provide the time needed to clear backlogs and get new loans in the pipeline. Thorough preparation can mean the difference between a year that’s profitable and one that operated at a loss.

For more information on Axos Bank™, a federally insured institution, and our Warehouse Lending Program that’s built on security, trust, and responsiveness; please contact us by phone at 1-888-764-7080 or by email at [email protected] today.