Like Wells Fargo & Co. and GMAC LLC, Flagstar Bancorp Inc. is looking to expand its warehouse operations, but unlike those two, the Troy, Mich., thrift company is doing so with a technology twist.
"We are open for business on the warehouse side," said Steven Brooks, executive vice president and chief operating officer of lending at the company's $14 billion-asset Flagstar Bank. "We are one of the few that have lasted through the change in the mortgage environment. We haven't aggressively advertised — but we will going forward — that we're actually stepping up our efforts. We're planning on growing larger on the warehouse side."
Since reaching a peak of more than 115 in 2005, the number of active warehouse lenders has declined to fewer than 30 today, according to the Warehouse Lending Project, a coalition of mortgage lenders formed to lobby policymakers to support this kind of financing.
This year Flagstar Bancorp has received $300 million from an investor group led by MatlinPatterson Global Advisers LLC and $266.6 million from the Treasury Department's Troubled Asset Relief Program. It expects to close on another $50 million from the MatlinPatterson group this quarter.
On a conference call last month, Thomas Hammond, Flagstar's chairman, said it has used some of the capital to expand the warehouse business, "which we view as a natural complement to our mortgage business."
Flagstar said it provided $1.2 billion of warehouse advances last month and in March. The company's goal is to take the monthly total up to between $1.5 billion and $2 billion.
It provides warehouse lines to mortgage lenders that sell their loans to the company and to other investors. "We want to make it easier for them to deliver to Flagstar as that end investor," Brooks said.
To entice correspondents to choose it as that end investor, Flagstar will encourage the use of technology, in addition to financial incentives, Brooks said.
For example, he said, if customers close loans electronically, "we'll move that loan to the top of our purchase list" and purchase it within a day or two of the closing, he said.
Usually, "with capacity being what it is today, it's taken us five or six days to turn a file." However, "with an e-closing, there isn't much for us to review," Brooks said. "That loan will go to the top of the line. We'll buy it in 24 to 48 hours, and it'll free their warehouse line up to do more loans."
To further encourage electronic closings, for two months Flagstar will lower the administrative fee it charges warehouse customers by $100 per mortgage if they close loans this way.
"After that the incentive will go down to $50 per loan," Brooks said. "And after that it'll go to a negative" — Flagstar will increase the administrative fee for those that do not close loans electronically.
"We'll start with carrots and move to sticks … and we'll ratchet up that disincentive, as well," he said. "We want to change the industry's culture by first giving them the time to change over to electronic processes."
Flagstar is endorsing an electronic process because it helps the lender control the risk associated with every loan, Brooks said. The company says it has used technology to mitigate fraud and create a better process that results in a better quality loan.
For example, it runs every loan through FraudGuard, a detection program developed by ISO Properties Inc.'s Interthinx, and other quality control tools. It is also using the Mers loan registry "to check against double funding," Brooks said.
"The warehouse business is a good business if you can manage the risk," he said.