Innovative Funding Strategies

1. Innovative Funding Strategies Michele Perrin Mortgage Banker Finance MBA National Convention, October 26, 2004

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:

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.

11. Off-Balance Sheet Treatment Effect

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!

16. Thank You!