Presentation on theme: "Innovative Funding Strategies Michele Perrin MBA National Convention, October 26, 2004 Mortgage Banker Finance."— Presentation transcript:
Innovative Funding Strategies Michele Perrin MBA National Convention, October 26, 2004 Mortgage Banker Finance
2 Funding Strategies Warehouse lines of credit Traditional repurchase (repo) lines Gestation lines Early purchase facilities – similar to gestation with some new twists
3 Comparison of Funding Strategies: Description Warehouse Lines Repurchase Facilities Gestation ReposEarly Purchase Provided primarily byBanksWall Street Banks, Investors Line SizesLimitedLarge Accounting Treatment On balance sheet On or Off balance sheet Off balance sheet Non-use feesYesUsually notNoUsually not Takeout Commitment Required?UsuallyYes Usually Will it fund wet?YesSomeNoYes Will it fund to closing?YesSomeNoYes Require Personal Guaranty?YesSomeNoSome Advance RatesUsually 98%Up to 102% Up to 100%
4 Warehouse Lines Offered by Banks Accounted for as a borrowing Increases leverage Limited line sizes Not bankruptcy remote Carries a non-use fee Requires personal guaranty of owners
5 Traditional Repurchase Lines Offered by Wall Street brokerages May use financing or purchase language Often won’t fund wet Usually requires a takeout commitment Offered to broker’s active sellers Not committed May fund over 100% of par
6 Gestation Repo Always requires a takeout commitment, often in the form of an agency forward Does not fund wet or to the funding table Usually off-balance sheet Generally does not require guaranties or commitment fees (not committed) May fund over par
7 Early Purchase Facilities (EPFs) Off-balance sheet Some providers require that the loan be sold to them May or may not be committed May have no personal guaranty Generally carries no non-use fee or commitment fee
8 Other Features of EPFs Will fund wet and to the closing table Available in larger amounts than warehouse lines Some do not require that the loans be sold to the provider as investor May be committed for up to one year May not require takeout commitment at time of funding May allow funding of Alt-A and subprime loans May fund up to 100% of par value
9 Off-Balance Sheet Treatment Recorded as sale when funded by provider Reduces leverage Improves liquidity ratio by decreasing current liabilities May reduce the required net worth by keeping the leverage lower
10 Why Off-Balance Sheet Treatment? Lenders usually require the leverage ratio (liabilities divided by net worth) to be greater than 15:1 Lenders want to see a liquidity ratio (current assets divided by current liabilities) of no less than 1.03:1 to 1.05:1 Cash as a percent of assets: Lenders would also like to see cash of about 1.5-2% of total assets Off-balance sheet facilities help reach these goals as shown in the following example.
12 Why Does a Repo or EPF Get Sale Treatment? The legal document is a Purchase and Sale Agreement The transaction must not require repurchase by the Seller—the purchaser completes the pre-arranged sale to a third party investor Must be bankruptcy-remote—that is, it must meet the legal requirements for a sale Must meet requirements of SFAS 140 for auditor buyoff
13 SFAS 140—Three Requirements to Get Sale Treatment Transferred assets must have been isolated from the transferor—even in bankruptcy The transferee must have the right to pledge or exchange the assets it receives No repurchase agreement
14 Caveats for Users of Off-Balance Sheet Vehicles Must be monitored closely for stale loans just like a warehouse line Maintain adequate net worth and liquidity to manage risks of all loans in the pipeline Some warehouse lenders will add these balances back to calculate covenants
15 Conclusion Find out more about these facilities and see if one of them is right for you Ask your current lenders how they would treat such a facility Check with your auditors about how they would treat the facility you have in mind (they may need to review the agreement) Ask lots of questions—these facilities vary greatly in what they will allow Then get ready to grow!