Document custodians go by many names – warehouse custodians, agency custodians, preferred custodians – but their function is the same. They hold the documents that evidence underlying collateral for various financing and structured transactions. Documents are held, for example, for private securitizations, agency mortgage-backed purchase programs or mortgage repurchase obligations.
More issuers, servicers and warehouse lenders are recognizing the benefits, for all parties involved, of partnering with a custodian that offers a comprehensive document custodial service profile:
- They’ll be better positioned to offer knowledge and insight they’ve earned through experience.
- They’re better equipped to provide comprehensive document custodial services customized to your specific goals.
- They’re committed to your business and your success.
- They’re connected to the markets they service.
- They’ll be better able to anticipate and meet all your document custodial needs, both current and future.
We’ll explore these and other advantages in greater detail below.
Key advantages
Talk to almost anyone in the warehouse lending field who uses a full-service custodian. They’ll likely tell you they consider that engagement one of their most valuable business relationships. This is because comprehensive custody provides a broad range of benefits.
Risk mitigation: Collateral ownership will often transition during the presecuritization life cycle. Mortgage loans can transfer from correspondents to lenders; between wet and dry facilities (mortgage loans funded at closing are wet – they become dry once the collateral documents are received by the custodian); and from lenders to a gestation repo line prior to the investor’s purchase. Each time collateral documents change hands creates a potential risk for document loss or damage. Having the same custodian during the warehouse phase through final sale streamlines the collateral transition and provides greater control. A good custodian will have systems and protocols in place to protect the documents in custody while accurately reflecting ownership throughout the life cycle of the collateral.
Cycle time reduction: Many consider pipeline liquidity a critical component of a healthy warehouse facility. Using a full-service, “one-stop-shop” custodian for both the warehouse period and takeout review (for agency cash and mortgage-backed securities) will reduce the cycle time. Ideally, the custodian will perform a single document review that accommodates all requirements at once. This eliminates exception surprises at the time of sale due to different requirements delaying purchase for exception cures.
Potential cost reduction: Cost savings may also be realized by using the same custodian. The one-stop custodian will, in most cases, need to physically review a file only once. They would then be able to use data comparisons to perform subsequent reviews as the collateral transitions from purchase to sale.
Process efficiency: Having a custodian that is both your warehouse and agency provider may streamline other events, such as resales related to early buy-outs and transfers between warehouse facilities.
Taking on additional roles: Your custodian can serve as a disbursement agent by facilitating timely wires to closing tables. They can also serve as a securities and settlement intermediary by accepting bonds and cash payments for repayment back to the facility.
Aligning your direction
A custodial partnership should be based on mutual success, and all parties should understand each other’s goals. This helps improve responsiveness and flexibility within an ever-changing market. The more touchpoints you have with your custodian, the better they can support your strategic direction.
Equal Housing Lender