For mortgage banks, it is an unsalable loan.
Mortgage banks literally borrow money to fund mortgage loans – using what is called a “warehouse line.”
Mortgage banks only make money if and when they sell those loans that are “sitting” on their warehouse lines.
For example, when a mortgage bank funds a $500,000 loan with its warehouse line, it tries to sell that loan at a “premium” to other investors as fast as possible.
A mortgage bank might sell that loan for as much as $510,000 to $530,000 depending on the rate and the terms of the loan.
They then use those funds to cover expenses and commissions and also to pay down the warehouse line – so they can use it to fund more mortgage loans.
Note: Sometimes mortgage banks run out of “capacity” on their warehouse lines (like a maxed out credit card) and are unable to fund loans until they sell loans that are “sitting” on the warehouse line.
If lenders can’t sell a loan, they not only don’t make money – they face enormous penalties and losses.
The warehouse-line-lenders penalize mortgage banks severely if loans sit on the warehouse line too long.
And mortgage banks face hundreds of thousands of dollars in losses if they can’t sell the loan on the secondary market and instead have to sell it on what is called the “scratch and dent market” (for loans that do not comply with standard guidelines).
STIPS = POST-CLOSE CONDITIONS
Sometimes when mortgage banks fund loans and ship them to investors who have agreed to buy them, the investors find problems with the loan (usually missing documents that are necessary for compliance) and the investors then refuse to buy the loan.
Those investors then come back to us with what are called “stips” or conditions we still need to satisfy before the investor will buy the loan.
In this situation, mortgage banks are left with the very tough task of going back to borrowers after a loan is closed in order to obtain those final conditions.
Needless to say, many borrowers are reluctant to provide additional info or documents after the fact while mortgage banks are desperate to obtain them in order to avoid massive losses.
COMPETITOR GOES TO BAT FOR US
After the COVID-19 crisis hit, we got hit with more stips than ever, and it was harrowing to say the least.
In one particular incident, a borrower went completely dark on us and we were facing major losses.
But fortunately for us, that borrower had gone to a competitor of ours and mentioned the stips we were trying to collect.
That competitor both knew us and the risks we faced, and very convincingly coaxed the borrower to comply with our requests – saving us tens of thousands of dollars.
Why did he do it? Because he is an honest and honorable man; because he well understood the risks we faced; and because he knows we would do the same for him or any other mortgage bank (as we have many times).
That competitor was Chris Mason and I’d like to thank him publicly for his help.
Thanks again Chris!
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
