Move From LIBOR Further Complicates Warehouse Funding Decisions

May 25, 2022

Key Ideas:  

  • Libor used to dominate warehouse line Agreements
  • Warehouse line agreements now are referencing a wide array of interest rates
  • Diverse sets of reference rates provide optionality to the originator
  • Innovative decision engine simplifies complex funding decisions

Mortgage lenders spent the last two years transitioning away from Libor. All new mortgage-backed securities issued by Fannie Mae® and Freddie Mac utilize SOFR. But while the GSEs have settled on one benchmark, the warehouse lenders offering short term financing have embraced a variety of new reference rates adding to the complexity of managing warehouse facilities for independent mortgage originators.

As a platform for optimized funding decisions with relationships with over 60 warehouse lenders, OptiFunderSM is uniquely positioned to see what is emerging as the dominant benchmarks warehouse lenders are using. Review of recent OptiFunder platform transactions revealed warehouse lenders are utilizing five key indices including:

  • SOFR or Secured Overnight Financing Rate whichis based on transactions in the Treasury repurchase market, where investors offer banks overnight loans backed by their bond assets.
  • AMERIBOR® created by the American Financial Exchange, it’s calculated as the transaction volume weighted average interest rate of the daily transactions in the AMERIBOR overnight unsecured loan market on the AFX.
  • BSBY or Bloomberg Short-term Bank Yield Index provides a series of credit sensitive reference rates that incorporate bank credit spreads and defines a forward term structure.
  • Prime largely determined by the federal funds rate
  • Note Rate with specific spreads

The diverse sets of reference rates provide optionality to the originator as the reference rates don’t move in lockstep. The increase in rate variability, combined with other considerations for funding allocation, such as non-use fees, rebate incentives and even cash-in accounts, can make these crucial decisions even more complex. OptiFunder’s Warehouse Management System (WMS) utilizes AI, machine learning and data optimization science to improve and automate these complex decisions.  Its optimized decision engine employs all three tools to evaluate across countless reference rates and deliver the result that achieves the desired outcome such as minimizing interest expense, maximizing ROE, or achieving certain funding allocation targets.

Additionally, OptiFunder’s Warehouse Management System provides real-time expense reporting and projections. For the first time, mortgage bankers have robust business insights available to compare costs across facilities and analyze the complete cost of capital—a valuable tool to combat shrinking Gain on Sale margins and evaluate any possible impacts of diverse benchmark rates on funding expense. In a contracting and changing marketplace, embracing innovative technology solutions can bring the agility needed to maximize operational efficiencies and reduce the cost of capital. Currently, OptiFunder is the only platform that provides the decision engine mortgage bankers need to optimize these new indices, see their financial impacts, and automate all funding and purchase advice processes.

For more information, contact:

Brian Abbott, COO

Brian Abbott

Chief Operating Officer, OptiFunder
About the Author

Brian Abbott serves as the chief operating officer for OptiFunder, leading executive strategy, business operations and client experience. Abbott specializes in strategic growth Initiatives, Blitzscaling, startups, mergers and acquisitions. operations management, partnerships. He began his career as a mortgage banker and transitioned to building high growth technology solutions for the mortgage origination and secondary markets. Prior to OptiFunder, Abbott served as director of operations for the Mortgage Builder LOS division of Altisource and vice president of corporate development for Mortgage Builder Software.

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