Mary Kladde
I am feeling very validated. Yesterday, John Courson, MBA President and CEO, gave testimony to the House Financial Services Committee entitled “Promoting Bank Liquidity and Lending through Deposit Insurance, HOPE for Homeowners, and Other Enhancements.” In that testimony, Mr. Courson echoes my call for attention to the crumbling infrastructure of warehouse lending for the primary market.
While for many this is a theoretical issue and crisis, here on the frontlines –from an “in the trenches” perspective, it is hard not to miss the white elephant in the room. If the end result of all this stimulus spending is to encourage homeowners to refinance and purchase homes through more aggressive programs, expanded lending limits and lowered rates, then you have to provide the warehouse lines with the same attention and relief as the end investor in the transaction.
For a quick analogy… A few years ago, there was a crisis as the medical industry just ran out of flu vaccine. The government spent billions of dollars to enhance the capacity of the pharmaceutical producers. Why? Because the common good dictated that we ensure public health by providing access to the flu vaccine. What if there was a concurrent crisis in the sterile vial and syringe industry… one that reduced the production of the vials and syringes by 85%? How effective are the billions to the pharmaceutical labs when you ignore the fact that there is no longer a mechanism to get it into a patient’s arm?
I’d like to take some time to analyze and discuss Mr. Courson’s testimony from the small business perspective.
First, there is nothing very interesting about Warehouse Line Lending. There will be no Frontline or 60 Minutes expose of this issue – because it is pretty dry. Warehouse lending is short term line of credit extended to a mortgage banker to fund a loan at closing (primary) – replenished when the loan is sold to an investor (secondary.) The entire transaction usually takes less than 30 days… here at Titan, we are often able to turn our customer’s lines two or three times per month. It isn’t complex. It isn’t hugely risky in a market denuded of anything more subprime than FHA. However, from a market perspective it is the Maginot Line between being a mortgage broker or a mortgage banker. Boring or not, warehouse lending provides the ONLY vehicle for independent mortgage bankers to operate and fund loans today.
Who are these independent mortgage bankers? These are thousands of small to mid-sized businesses across the country that have weathered the worst that their industry could offer in the last two years, and still had a strong enough business model to persevere AND meet the net worth requirements required to even be eligible for the line in the first place. These companies employ a large portion of the industry’s operations, support and sales staff at the community level. While layoffs at these companies don’t make headlines, when you add up the tens of thousands of employees at risk, it is definitely comparable to other major US industries.
Why would they lose their jobs? When a lender closes loans, but their warehouse facility is unable to fund the loans – because they have just run out of capacity, borrowers get justifiably angry as their locks blow or their contracts expire, so they walk away and go to your competition. You cannot run a business on the “promise” of a funded loan any more than a restaurant could run successfully on the “promise” of a cooked meal. Costs start to rise, sales staff leaves the company, revenues fall and layoffs begin.
I felt much validated that my finger in the wind test, with respect to the reduction of warehouse line availability, was in line with the researched position of the MBA. Although I was about 10% off, it bears repeating:
Warehouse lending capacity has declined dramatically – from over $200 billion in 2007 to approximately $20-$25 billion in 2008, a decline exceeding 85 percent. For the mortgage originator that depends solely on warehouse lines of credit, this reduction threatens to extinguish their lending business and adversely impact consumers in their market, stifling the real estate recovery before it has a chance to get off the ground. – John Courson Testimony 02/03/09
This being said, I think we can definitively say that current influx of TARP cash and its neglect of the primary has skewed the power in the mortgage market to the “bigs,” (Chase, Citi, Wells, BOFA), allowing them to leverage increased demand to drive current interest rates being offered to consumers. With the historical drop in rates, I have personally seen many borrowers refinance or purchase homes with independent mortgage bankers at sub 4.5% on a 30 year fixed. However, the “Bigs” are already conceding that despite the “market’s” efforts to drive down rates at the Treasury level, costs, demand and fear of further market erosion are keeping rates higher. That is directly absorbed by the homeowner. Without competition or the possibility of competition, there is no doubt that it will extend the length of the market downturn. That seems very counter-intuitive.
We have read all about supply side economics… but we, in the small business world, are still waiting for the trickle. In what could only be deemed a PR fiasco, the trickle seems to be frittered away in the most frivolous, indirect forms:
- $10 million dollar beer tent for Bank of America at the Super Bowl.
- A lavish multi-million 12 day Vegas Convention for Wells Fargo Mortgage
- A $400m commitment by Citi to put their name on the new Yankee’s stadium
Even a hard core, laissez-faire, pro-business advocate sees there is something really wrong about this – and while it wasn’t codified in the original bailout plan precisely, I think we are all a little shocked at the self-serving attitude going on in the banking stratosphere. What’s mine is mine and what’s yours is mine….oh, and thanks for the spa day!
I ask you, WHAT ABOUT DOING THE RIGHT THING?
I support Mr. Courson’s comments and recommendations toward broadening TARP fund eligibility to financial institutions outside of the scope of depository institutions. Did you know prior to very recent history (within the last 6 months), over half of all loans originated were originated or funded by independent mortgage bankers? That percentage represents a lot of jobs and subsequently household spending in most cases. You can find the epitaphs of hundreds of companies who have lost their line capacity already written on the wall of the IMPLODE-O-METER.
Now, I’m not talking about turning over millions and billions of dollars to independent mortgage bankers without direction or regulations -as we’ve done with the larger institutions. I’m suggesting we set up a thoughtful, well –regulated, quality driven program to support and enhance the capacity of the primary market. The criteria set forth by Mr. Courson and the MBA with respect to minimum corporate net worth and meeting federal licensing standards would be the litmus test for eligibility participation. There are no increased requirements for the independent mortgage broker – they have to prove their financial viability already.
One issue of concern to me in Mr. Courson’s testimony is the direct subsidization of current Warehouse Line Lenders. It is a good step, but definitely not a whole solution. To be sure, the warehouse lenders need support , relief and access to additional funding; however, it is impractical to assume that these few remaining lenders can absorb the additional operational capacity required to adequately capitalize the market alone. We need a whole market approach led by those lenders that have stayed in the market, direct lending to larger organizations, and support for new warehouse lending entities entering the market. We can neither expect nor force the current beleaguered warehouse lines to scale their operation up by a thousand percent. The reality is they don’t have to do anything – to include taking the TARP money.
If we design this program, we need to be very specific about how the money is used. No shoring up balance sheets – just lending to the primary. So, let’s avoid the temptation all together and setup a surgically precise program – one that will benefit the primary, provide ROI to the taxpayer /gasp and fund itself through fees and interest income. Warehouse lending is very profitable. I know – it’s the socialist in me (ha ha – here my sarcasm), but, If taxpayer is the primary investor, then they should realize the same ROI as any other investor in the market.
