Lykken on Lending

If you’re not comfortable with your warehouse lender, you may be overlooking a valuable resource because guess what? A warehouse lender can be an advisor when selecting and financing the equipment you need for your business! In today’s episode, Drey Roberts uncovers how warehouse lenders can help you grow your company by providing access to the best financing options available. Drey has been a legend in the warehouse lending space with 22 years of experience in the industry. Tune in to understand more about the role of warehouse lenders and how they can give you the upper hand!

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Using Your Warehouse Lender As An Advisor With Drey Roberts Of Independent Financial

I’m excited to have Drey Roberts, a legend in the warehouse lending space. He’s very knowledgeable. One of the things I like about Drey is that he’s so humble. Drey, we’re excited to have you joining us. Thank you for being here.

It is my honor. Thank you so much for having me.

For those that do not know you, give us a little bit of your background and how you got to where you’re at now.

I’ve been in the industry for many years. I started my career at Countrywide Home Loans. I’m originating loans. I did that for a couple of years and then spent the next 15 years or so in the correspondent wholesale emerging correspondent space much of it at Flagstar Bank. I then transitioned over to the warehouse side. I have been in the warehouse side since 2013. I was doing the math. I was like, “It goes by faster than I thought.”

Tell us a little bit about Independent, the bank you’re with, and the scope and the size of the reach of the bank.

The bank’s footprint lies in Texas and Colorado. It’s a $20 billion bank. It trades under the stock symbol IBTX. We’re a bank that deals with multiple things, more of an acquisitions bank, and that’s perpetuated our growth. Our warehouse lending division was part of an acquisition of Northstar Bank back in 2017. We’re proud of the fact that Forbes ranked us the number six Best Bank in the Nation in 2021 based on real metrics, not on how much we advertise with them or anything of that nature.

Great banks hire great people and you’re one of them and we’re thrilled to have you here, Drey. What we need to get into is talking about warehouse lending. We’ve had a lot of warehouse lending episodes talking about warehouse lending. Especially in the time and the season we’re in, it’s important for people to understand the role of the warehouse lender.

We all know that the warehouse line is the lifeblood and the heart that keeps independent mortgage banker funding loans and independent in other ways. I want to say a special shoutout to Jim Harrison, who has been a big fan and an audience of the show as you are, Drey. I want to get into talking about your role as you see it as a warehouse lender.

Warehouse lending is interesting. It changes as the market changes. In 2021, I was telling people, “Retain as much liquidity and net worth as you can because we’re about to get busy. You’re about to need as much warehouse capacity as you could possibly get.” I didn’t even fully understand the scope of what I was saying, but it was like, “We’ve got to get big and you’ve got to get busy. Save your money so we can expand your warehouse line.”

It’s because your warehouse line is based on the net worth of the company in a leverage ratio. We use to calculate that. It’s much more than the guy with the money. We’re on the opposite side of that. We’re trying to help our clients understand what they can do to make their businesses run more efficiently and operate in the new environment that we’re in. For us, we’ve done a good job of bringing people because we’ve been in a growth mode for so long, and we want to continue to grow.

We’ve brought on some specialized people that are the best in class in what they do. I’ve got people that have worked in the emerging correspondence space. I’ve got a young man who has worked in the secondary market area for most of his career. He understands hedging, MSRs, and all of that. I’ve got somebody who’s worked in credit for close to twenty years and understands accounting very well.

I’ve got a young man who started with me and he made it his goal to be omnipotent when it comes to MSR financing. I’ve got an operations manager who understands the whole back end. Ultimately, knowing all of that, we have a leader whom we report to, James Hinton, who has been in the industry for many years.

He is truly the most knowledgeable person. He knows everything. He truly is a legend and a wonderful teacher as well. We’ve got partners. We’ve got people like yourself at Transformational Mortgage Solutions whom we are in constant contact with that to have so much knowledge and are able to help me and my clients. Obviously, you’re able to help people directly as well. The point of that is that it’s important to have a relationship with your warehouse lender. Being in communication and understanding that we are here to help in the good times and the bad times.

Warehouse Lending: It’s important to have a relationship with your warehouse lender. Be in communication and understand that we are here to help in the good and bad times.

We’ve certainly gone through some unprecedented good times. It seems like we went right off the cliff into some of the most unprecedented, most difficult times. Do your clients feel trepidation to reach out when things are as difficult as they are right now?

Some of them do feel trepidation. Some of them are very quick to reach out because we’ve tried to tell everybody, “Make your first phone call to your warehouse lender when you have problems.” When you have a loan that’s unsellable or you’re not got to be able to meet your covenants, call us first. Let’s see if we can work something out. Some of them are hard to do. I had a phone call from a midsize client and the first words that’s out of his mouth were, “Drey, please talk me off the ledge.”

We started talking about it and he goes, “I had my first loss ever. I’m got to have to send my financials to you this quarter. If there’s got to show a loss, what’s going to happen?” I was like, “Let’s talk about the whole thing.” What I explained to him is that his run rate or burn rate on his cash was something 26 months at the current amount of money he lost.

That’s what we’ve got to look at. He has plenty of money to sustain his business. We can do an exception to his covenant bus and move on down the road. We quickly went into a social conversation talking about family and everything, and he hung up and said, “Thank you for talking to me off the ledge. I feel way better now.”

The warehouse lending relationship is the most, as we said earlier, important relationship to any Independent mortgage banker. That is certainly the case. You and how you respond to their difficulties can end their business for them or at least, you did make them feel much better. I applaud you for that because you guys are always the ones that should be the first call.

It was Lynn Markel and Bill Ritter who had had my first warehouse line years ago, and they said, “The first call when there’s bad news should probably be to your wife. The second call should be to your warehouse lender. Don’t forget that. The only reason you can bring out the 1st one tells you how important the 2nd one is.” It always stuck with me, Drey, and a lot of people run in fear. What advice would you say to those that are feeling that fear? How would you advise them to overcome that?

What we do is we want to put them through a talk about stress testing their company. What do you have? What do you not have? Let’s talk about right-sizing the company and having candid and transparent conversations with employees because they know what’s going on. You can’t hide what’s going on and explain to them what the plan is so you don’t have everybody running scared.

We want to talk to them about meeting their covenants and what we can do, and having proactive conversations with the warehouse lenders to meet those covenants. I’ve got lines of credit that are very large right now, and they’re maybe 10%, 15%, 25% utilization because these larger companies, maybe a refreshed app. They’re not getting as much of the volume as they were getting before. Have a proactive conversation about cutting the line to the lead.

You hit on the word proactive. The most important part of this thing is being proactive in your communication, especially with your warehouse lender and all your counterparties certainly what’s going on. That’s one of the biggest ones. Also, one of the things I add value is when I owned independent mortgage banking companies. It was the fact that you guys were some of the best advisors I could go to. As consultants, we add value but your first advisor should be your spouse. Whether they know anything about mortgage lending or not, they could help you in some regards.

The second one, which is going back to one of the most important relationships you have other than your spouse in owning as a business owner of a mortgage banking company, is your warehouse lender. I love the stories. You talked about the guy that you talked off the cliff. Any other stories where you have made that difference and helped people navigate through times of uncertainty and given them the direction of what they should be thinking about next?

We like to talk about what-if scenarios. There are situations where people are saying, “I am going to cut every expense I possibly can. I’ve got to run lien.” I have a client in Florida, and he’s like, “I saw this coming. I shelled the company. I’ll do loans if they come in, but I have eliminated all my expenses.” He is as happy as can be because he knows this is waiting for the next refi.

I do remember sitting at a warehouse round table meeting in 2019. We had to go around the room and everybody had to project what the next year would look like. Everybody was like, “It’s got to be 5.5%. We’ve got to be doing X percent of volume less than we did last year, etc.” I didn’t know. Nobody knew that COVID was coming. Nobody knew that 2020 was got to be what it was. What I thought was important is that we’ve talked to our clients about verbalizing their costs and creating relationships with third parties that can help them. We’re all thinking about volume going down right now, but what if it goes up?

You don’t have any staff to handle it. You don’t have warehouse capacities or the net tangible net worth to get an increase on your warehouse line. Have partners out there. A great example is there’s third-party fulfillment providers or doc prep companies that can handle the overflow. You may be able to handle 50 loans a month, but if you’re doing 150 loans a month, are you got to hire that staff right away? Are you got to be able to hire that staff? Have partners out there that will help you. There are variable-cost partners out there that can help to handle the volume if it does come in.

It gets to the next point. What are some of the things you think that independent work mortgage bankers need to be focusing on now? You brought up a variable cost model. Stressing that is important. Anything else that you’d recommend that they be focusing on right now?

Right-sizing the company, reducing overhead, and renegotiating with your warehouse lender. Be transparent with them. Let them know what’s going on. Cutting expenses that make sense and cross-training team members. That’s one of the things that we’ve done a good job here, particularly in our operations team.

Almost everybody on our operations team can do anything. We’ve been fortunate here. We haven’t had to cut anybody. We’ve had natural attrition, but one of our team members over there can fund loans in the morning and she can settle loans in the evening. She can ship or he or she can do whatever needs to be done in that department.

If you could cross-train, have conversations with your employees as well. Some people are very concerned about losing their job but are willing to do things like stay with that company on a part-time basis. It has become very evident. There are not a lot of jobs out there if everybody is in the same boat.

Discuss some part-time options and put the employees that you value. As I said, we do the what-if scenarios. Those are some of the basic things, but it’s great to have a conversation with somebody, dissect the scenario, and give them a specific answer to that problem they have. There are all different-sized clients and everybody has a different way of generating business. Everybody has a slightly different way of running their companies.

I love the fact that you have all the expertise in your staff. You talked about that when we first started this conversation. A lot of depth in expertise inside of your department helps these mortgage bankers. They need to take advantage of that. How much do you get into evaluating and recommending a different business strategy? You talked about the guy that was all refinanced. Do you talk throughout the market and cycles about changing strategy or the adjustment of overall business?

That advice varies based on the size and the complexion of the company. You may have one company that’s smaller and it’s easier for them to get real nimble because they’re already variable-sized, but when you start talking about larger clients, there’s some conversation. Candidly, we do something called a third-party field audit for larger clients and we pay for it because the advice that we get is so valuable. I know that your company does that, David. We don’t know everything. We don’t pretend to know everything. We’ve tried to put the right people in place and it’s great to have third-party partners like yourself.

They can go out and say, “Here are some weaknesses.” We’ll see companies that are growing to a certain level and they’re using outsourced accounting. You’re getting to a level now that it’s time to think about hiring a CFO. This could be a goal for next year. It is hiring a CFO. A lot of people are like, “I don’t want to do this audit.” By the end of it, they’re like, “I learned some valuable information.”

We have a team that goes out and does these warehouse reviews and operational audits. There are different names that different ones put to it, but there’s almost this. We’ve got to look perfect when we come through the front door. I challenge that because it’s so important to realize this is a real opportunity to get an honest look. The question is, “How do you look at these reports when they come to you?” Is this critical? Are you looking at it with a critical eye or, as you say, you’re learning about their company? I wanted to dispel the theory or the fear that this is a report card. If it doesn’t come in looking really good, we’re in trouble with our warehouse lender.

We have never approved a client based on one of those reports, which would say and suggest that they’re not valuable because we’ve never uncovered anything, but it’s quite the contrary. They’re very valuable because that gives us an opportunity to work together to make some slight corrections or maybe even bigger than slight corrections to help their company operate more efficiently, safer, sounder, whatever it may be. We can help them or we can work together with them to get to that point.

You talked earlier about you bank a lot of companies of varying sizes. What should we know about some of the larger companies? If you could walk through in your mind how you’re viewing the relationship and how you’re handling the relationship differently based on size. If you could walk our readers through that a little bit.

There are some larger clients that we have that I’ve always said, “I learn more from my customers than I do from drawing upon my own knowledge.” There’s always something to learn from some of our larger clients. We’re learning from them some different ways of doing business and things of that nature. With a mid-size, larger client, they’re new to hedging, for example. We see them going long or short in their hedge position and we want to talk to them and ask them why. Why are you long or short?

I had one guy who was almost naked in his hedge position, not buying any coverage during COVID, and made a lot of money. Unfortunately, he lost a lot of money as it came, but it made more than they lost. He went in eyes wide. That’s not a client that we can necessarily do business with because we don’t finance risk.

That’s a great statement right there. We do not finance risk.

With our smaller clients, that’s where I’ve cut my teeth in the industry so I’ve got a very warm and soft spot in my heart for these guys that are making the transition from broker to bank. I get a lot of joy out of thinking about helping people. In some cases, showing them the benefits and everything. Giving them a step by step instructions on what they need to do to be able to function, first of all.

Secondly, how to operate successfully. Third, what are the benefits and how do you maximize those benefits? Making that transition from broker to banker and then to the next level and watching these guys. I’ve got a guy I used to work for and he said, “As a broker, sometimes as soon as they get a check from the title company, they’re getting new wheels for the BMW.”

He says that jokingly. As they progress into a correspondent, they start taking their books much more seriously. I start thinking about, “What is my net worth got to be? What is my liquidity got to be? How much profitability am I got to have? Am I got to be able to meet more?” Having to go through that exercise automatically makes them more attentive to their books and they run a better business when they’re more attentive to their books. These are some of the steps and then it’s like, “Now that you’ve got the million-dollar net worth, let’s talk about getting your title too and being able to originate FHA loans.”

I don’t want to hire an underwriter. You don’t have to. There are companies out there that you can assign your authority to and they’ll do it. Now you get a bigger piece of the pie because there’s a lot of margin in there. They can do things to help clients in different ways by having that additional margin.

Let’s talk about hedging. “Let me get you with our client services manager, who’s an expert at hedging and he can help you. Let me refer you to a good partner, one of the good hedge advisory firms. Let me help you make connections with broker-dealers, etc.” There are all these steps these guys take. We can point them in the right direction or point them away from some directions that haven’t been as successful.

Drey, we’re seeing an increase in the number of new companies coming into the industry, some de novos and originators saying, “This has been a rough ride with the company I’ve been working for. I want to go out on my own.” We looked at some of the bigger mortgage companies now. They started out as loan managers then they become brokers, and then went through the merging broker-to-banker transition. We’re seeing a trend that more of that is happening again, which is almost signaling the end of a cycle and entering into a new cycle. What are you seeing as far as this trend? Are you seeing more companies doing this going from broker to banker or getting into it as a de novo?

We’ve seen a big uptick in applications, which you’d think we wouldn’t be doing any applications right now. We’ve trained ten new clients. It was like seven clients we trained. We’ve trained at least 3 other new ones, so I’m thinking it’s right around 10. They are clients that work for maybe larger companies. The challenge that the larger companies have right now is margin compressions.

There are not 4 or 5 points out there. Six points were what we were seeing in 2020, so you may be looking at two points of margin. The larger company that is taking all that risk has to get a share of it. They have to have a risk hold back. You have branch managers. You have a lot of layers within that larger company. Ultimately, right now, the originators are seeing a smaller piece to the point where they may have to charge the borrower points in order to even do the loan. It’s the next thing that I talk to.

What is the entry net worth and point for someone that’s coming in that you’ll work with? Also, talk about the process that you will do. What is the extent that you help them through the transition?

Our minimum net worth is $150,000. You have to go down suspenders on those guys. Those guys are using the investor for underwriting. They’re using a third party for the fulfillment, docs, closing shipping, and funding. We’re funding the title company. There are a lot of belts and suspenders that put us in a situation. We’re not taking a lot of risks but it’s important for us to help them make that transition.

These are tadpoles that are going to turn into frogs that could turn into bullfrogs. We want to help, but that’s the minimum net worth. There are companies that will do it for less. I’m happy to take a phone call and I will guide people even at my own expense. Anyway, fast forward, that’s the first piece of the puzzle. At that point, there’s got to be some other things that need to be done.

They need to get known and fidelity. It’s going to cost them about $2,500 a year, but it protects them from loans that are sitting on the line. They’ve got to need to create investor relationships. The investor relationships will have a minimum net worth as well which typically is in line with what we’re talking about. Some of them are a little bit higher.

With our client services manager, we will train every client that comes in and teach them about everything they want to know. Additionally, these other parties. The doc prep companies that are doing the fulfillment, they’ve got plenty of training and they’ve got extra time on their hands right now to do training. There are a lot of resources in the industry that will help these guys make that transition and get to where they need to be. I always encourage people, “Put your foot in the water. Get a line of credit. There’s a minimal cost to doing it. If you like it, grow it. If you don’t like it, shell it.”

Go back to doing what you’re doing and you have nothing ventured at the game. Talk a little bit about when someone is ready, what’s the right attitude, framework, and mindset? What is the construct that someone should have if they’re making the decision to move from loan originator to opening up their mortgage county versus someone who is probably not well suited? Are there some general guidelines you can give us, Drey?

Generally, people that are experts at originating loans do very well at it. They want to take the best care of their clients. They want to give white glove service to their clients, and they’re willing to put a little bit of extra work in to do that and jump over a few more hurdles. Ultimately, the thing about making the transition from broker to banker is that there are about 7 or 8 touchpoints on a broker loan for the mortgage company that you’re dealing with. You have disclosures, appraisal, compensation model, change of circumstance underwriting, locking, and then closing of the loan.

There are a lot of touchpoints. With the transition of correspondent, you can say, “I’m going to look at an investor that has great pricing and good underwriting. You could get my loan underwritten proficiently, and then I’m going to a la carte the rest of this stuff out. I’m going to do my own disclosures or I’ll use a third party for it.

I’m going to get to pick the appraisal management company that I want to use. There’s a local appraisal management company right here that does an excellent job. I get to use them instead of some national conglomerate. I’ll do my own change of circumstances. I still got to use the investor for underwriting, use them for the lock, and to purchase the loan off the market, but I get to pick my own closing team whether I do it, the investor does it, or a third-party fulfillment company does it.

It turns that whole process into an a la carte process where you get to pick the best of the best. That is the person that wants to make that transition and disposition. That person is somebody who said, “I want to grow my business. I want to create a better experience for my client.” We have so many things right now that can hold us back. One of them is social media. If we give our clients a bad experience, social media is going to brutalize us. If we give them a good experience, it can be our friend. That’s that mentality.

Warehouse Lending: We have so many things right now that can hold us back. One of them is social media. If we give our clients a bad experience, social media will brutalize us. If we give them a good experience, it can be our friend.

There are so many aspects of what we’re talking about here of someone making that decision. It starts with a conversation. How can people get ahold of you, Drey, and our team? Whom should they be calling and what’s the best way for them to connect?

There are four of us that handle the sales side. I’ve got myself as the National Sales Manager. I’ve got Jim Harrison, who’s my right-hand man. He and I work together. I’ve got Steve Harris and then I’ve got Alex Gouss. He’s new with us, and he’s a brilliant young man who’s learning everything quickly. There’s always LinkedIn. This whole team will take care of you and the people that support those folks will take care of these guys as well. Guys and gals, thank you.

Very exciting. Thank you so much for taking so much time. It was great that we have a conversation with you about this. There’s so much that I want our audience to learn about warehouse lending folks. Outside your spouse, the warehouse lender should be your best friend and best advisor. I encourage you to get ahold of Drey and his excellent company, Independent Bank of Texas. I am excited and thrilled to have the relationship we do with you, Drey, and your team. Thank you.

By the same token, I would encourage people that are growing their businesses, when you get to a certain level to look at your company, Transformative Mortgage Solutions. It’s an investment in your company going from being good to being great.

It’s our enjoyment, and it’s a passion to help this industry and give back for all the years we’ve been doing it. Thank you for what you’re doing. Drey, it’s great to be here with you. Thank you.

Thank you.

Important Links

• Drey Roberts
• Jim Harrison – LinkedIn
• Steve Harris – LinkedIn
• https://www.LinkedIn.com/in/Drey-Roberts-a79b2625/

About Drey Roberts

Drey Roberts has more than 20 years of experience in the mortgage industry. Roberts has experience originating loans, as an investor account executive, and in the warehouse lending space. He has spent the majority of his mortgage career transiting mortgage brokers into bankers on a national basis. Roberts has experience working for multiple investors and warehouse banks. He was instrumental in training account executives on the benefits of correspondent lending. Roberts is a veteran of the US Navy.