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Innovative Funding Strategies. Michele Perrin. Mortgage Banker Finance. MBA National Convention, October 26, 2004. Funding Strategies. Warehouse lines of credit Traditional repurchase (repo) lines Gestation lines Early purchase facilities – similar to gestation with some new twists.

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Innovative Funding Strategies

Michele Perrin

Mortgage Banker Finance

MBA National Convention, October 26, 2004

funding strategies
Funding Strategies
  • Warehouse lines of credit
  • Traditional repurchase (repo) lines
  • Gestation lines
  • Early purchase facilities – similar to gestation with some new twists
warehouse lines
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
traditional repurchase lines
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
gestation repo
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
early purchase facilities epfs
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
other features of epfs
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
off balance sheet treatment
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
why off balance sheet treatment
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.
why does a repo or epf get sale treatment
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
sfas 140 three requirements to get sale treatment
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
caveats for users of off balance sheet vehicles
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
conclusion
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!