Mortgage Industry News

A warehouse line of credit is simply a secured, commercial, short-term revolving line of credit.  The collateral is the mortgage, and the line is “repaid” upon purchase of the mortgage by the final investor.  The warehouse lender nets out the interest and fees and the remainder, including SRP, to the mortgage banker.

Today, hundreds of independent mortgage bankers (IMBs) will comb the Internet in their search for new sources of additional warehouse lending capacity.   Scouring search engines, web sites, news releases, blogs and forums, they will soon discover that very few options remain in traditional warehouse lending.  Like shrinking lakes in the sub-Saharan sun, the dwindling pools of warehouse funds have attracted more thirsty herds than they can quench. Extending the metaphor, the drought may be endangering a once dynamic species and threatening an entire economic ecosystem.

As a refresher for those who may not be intimately involved with the arcane element of warehouse lending: warehouse lines of credit are short‐term lines of credit secured by real estate collateral allowing mortgage bankers to fund loans (in their own name) at closing. The Warehouse Lender establishes a revolving purchase agreement with the mortgage banker that funds the loans at closing and extends interim financing for 15-30 days until the loan is purchased by the final investor. After closing, the loans are shipped to the final investor for review and purchase.

When the final investor purchases the loan, the final purchase price nets out escrows, fees and pays the Service Release Premium to the originating correspondent lender. The final purchase amount is sent to the warehouse lender to cover the initial funding amount. The Warehouse Lender then reconciles the cost of funds (the interest and fees they charge the mortgage banker for the short term use of said funds) vis a vis the purchase advice and credits the net amount earned to the mortgage banker.

Despite the persistence of those still in the market, our industry has been forced to acknowledge that these remaining warehouse lenders are taxed to their limits both with fundings and new applications.  Already at or close to their operational limits, they also face the regulatory constraints of saturation and balance sheet allocation. Simply put, they cannot lend ad infinitum to only one business channel, even if it is hugely profitable with low risk.

Understanding the threat to its core members, the Mortgage Bankers Association has been leading high level discussions, both educating and proposing options, with every major participant from Congress to the Federal Reserve to FHFA and the GSEs.   Recent discussions include proposals to involve the GSEs in administering or guaranteeing warehouse loans and lowering the Risk Based Capital (RBC) requirements for warehouse lenders to encourage participation by smaller banks and private equity.

Currently, warehouse lending by depository institutions is subject to a commercial lending risk assessment rather than the lesser RBC requirements associated with direct mortgage lending.   In the current lending environment, almost every loan being originated is either Agency or Government -backed; helping to establish the argument that risk is relatively minimal for these loans.

However, none of these alternatives will provide immediate relief, as they will require full due diligence, regulatory and possibly even legislative support.  More to come…