Merscorp Inc. has updated its electronic loan-registration system to address what some have called the biggest crisis facing the mortgage industry: the shortage of warehouse lines.
Those lines are the lifeblood of small and midsize home lenders. The updating creates added protections for warehouse lenders, which Merscorp hopes will make them more confident to do business.
"Warehouse lending has been severely curtailed," said Dan McLaughlin, an executive vice president at Merscorp, which is owned by a consortium of home lenders, mortgage investors and trade groups. "Anything that can be done to make it less expensive, more secure, and [that] decreases counterparty risk, is welcome. This Mers update should be a shot in the arm for the warehouse lending industry as we see it."
The updating lets originators electronically transfer control of a mortgage note temporarily to their warehouse lender, until the loan is eventually sold to an investor.
The project was originated when the wholesale mortgage lending arm of Cleveland's $14 billion-asset AmTrust Bank asked Merscorp "to create functionality so they could control the technology and still let its brokers originate an … [electronic note] in the broker's name," McLaughlin said. So Merscorp developed technology that "talks to the registry and creates the e-note coming from the broker."
The Reston, Va., company then realized the same principle could be applied to arrangements between mortgage banks and their warehouse lenders, he said. "The mortgage company can use their own technology to create the note and extend that to the warehouse lender to control the note only while the lender is tapping the line of credit."
The $16.8 billion-asset Flagstar Bancorp Inc. in Troy, Mich., in its capacity as a warehouse lender, has pioneered this model, he said.
Aside from giving warehousers more control over their collateral, the new process "also enables lenders … to originate more e-notes," McLaughlin said.
"If they are purchasing the note from a correspondent, for example, that can now be an electronic note."
If the Government National Mortgage Association is permitted to become a warehouse lender, as has been discussed, "this would be a good solution for them because this way they can act as a warehouse lender without having to invest in new technology," he said.
All told, he said, "we think this will have broad appeal for bringing back new sources of capital to the mortgage space."
The Mers registry was designed to reduce risk and generate profits for lenders because the notes registered on it are in an electronic format.
It trims the time between closing and securitization of a loan, letting the note move instantly and expediting funding.
Kim Weaver, the vice president of product management at Fiserv Inc.'s electronic lending platform, said the Brookfield, Wis., technology vendor has customers that want to operate as "electronic" warehouse lenders but that this was not possible until Merscorp developed its process.
"Our customers are asking for it," she said, "so I think we'll see adoption."
Industrywide, there is only $30 billion of warehouse liquidity per month — a $200 billion monthly shortfall.
"Mers has responded to this problem and has responded well," Weaver said. "We'll see usage of the update quickly, by this summer. … Also, as entities turn back to warehouse and start to see it as a growth area, this will be a selling point for them to do it," she said.