Mortgage Industry News

The need for a national warehouse lending solution is growing, and the issue is gaining speed and momentum both within the industry and in the national media. (If you missed it, we outlined using a national warehouse line to solve the national liquidity issue here. This post is also a good background for anyone just becoming familiar with the issue).

The Wall Street Journal continued their coverage this week in an article by James R. Hagerty:

“Many of the small mortgage banks that remain are struggling. Mortgage banks, often small, family-owned companies, aren’t licensed to take deposits and so lack that source of money for their loans. Instead, they typically borrow money for short periods from so-called warehouse lenders. They use this short-term credit to make loans to their customers and then pay back the warehouse lenders after selling the loans to bigger banks or to government-backed mortgage investors Fannie Mae and Freddie Mac.
“But this warehouse credit is much harder to obtain than it was a year or two ago because many of the big banks and Wall Street firms that used to provide it have exited that business.”

Read the full article “Under 5%, Mortgages May Be Near The Bottom“. In a related story, credit union originations were up by 17% in 2008, according to numbers released by Inside Mortgage Publications:

“Credit Unions are significantly increasing their mortgage originations in the current economic meltdown and credit crisis. According to new numbers compiled by Inside Mortgage Finance, credit unions boosted their mortgage production by a healthy 17 percent during 2008. That growth came at the same time that overall mortgage originations fell 39 percent. The result was that the credit union share of total mortgage lending jumped from 2.5 percent in 2007 to a record-high 4.7 percent in 2008. Almost one quarter of last year’s credit union originations came from just five institutions – Navy Federal in Virginia, State Employees in North Carolina, Pentagon in Virginia, Boeing Employees in Washington, and Alaska USA in Alaska.”

This report demonstrates as we have pointed out that the current recession and declining consumer confidence in large banking institutions has created a great opportunity for credit unions and community banks to grow their customer base. As many reports have highlighted in recent weeks, despite the struggles of mammoth lending institutions, smaller banks, community banks and credit unions have not experienced the same issues because they did not engage in risky investments or other questionable practices.

The issues of primary market liquidity and the need for warehouse line options to stabilize the mortgage market and help small banks continue to thrive despite the downfall of larger institutions in continuing to be a hot topic this week. Here are some recent articles worth noting:

Warehouse Lenders Thinning Out (MBA Newslink, American Banker - Paul Muolo)

PNC Financial Services Group Inc. and Guaranty Bank, the largest warehouse lenders after Colonial Bancgroup, both have confirmed that their warehouse lending operations will be discontinued. Liquidity will be further constrained as a result, and nonbank lenders will find it tougher to arrange financing just as the spring home-buying season kicks off. The Mortgage Bankers Association is pushing for new warehouse lending policies, with MBA President and CEO John Courson requesting a reduction in capital risk weighting on warehouse loans from 100 percent as a way to prompt more banks to enter the sector.

The national media is also starting to pick up on some of the current mortage industry buzzwords and connecting the dots between the stimulus, bailouts, TARP funds and the continuing need for warehouse lending options:

“The financial bailout program remains politically unpopular and has been a drag on Obama’s new presidency, even though the plan began under his predecessor, President George W. Bush. The White House is aware of the nation’s bailout fatigue; hundreds of billions of taxpayer dollars have gone to prop up financial institutions that made poor decisions, while many others who have done no wrong have paid the price.”

Read the full article: “Bonus furor may prompt limits on AIG bailout money.” As always, we will keep posting as the dialogue increases about these important issues. More updates soon!

by:Mary Kladde and Ruth Lee

The rise and fall of the Dow is a fickle bellwether for the health of our local economies.  As the small business arm of financial services, we can no longer wait for the macro solution.  We have begun to recognize that Wall Street is in no position to initiate a “surge” in the economy.  The Fed is focused on stabilizing the global economy, Wall Street and the “too big to fail” (perhaps too expensive to keep) mega banks.  However, locally, the deeply devastating impact of equity loss, property tax loss, job loss, loss of consumer spending and business closure is too proximate to neglect while waiting for the Fed to figure a path out of this.

The problem is too large if we consider it macro.  The answer isn’t thinking bigger, rather thinking smaller and turning to the only stable financial quarter in our economy with capital, our local banking industry comprised of community or regional banks and credit unions.  Of specific importance is the housing industry, which led the meltdown to recession and is critical to any reversal.

Today, the unsung survivors of the mortgage meltdown are local banks and small business mortgage bankers.  Local banks, like the remaining mortgage bankers, have stayed the course through measured growth and conservative business models.   They did not benefit from the largesse of the last ten years with windfall profits, but they also didn’t expose their shareholders, depositors or members to the irresponsible losses seen elsewhere.    As the front line of Main Street liquidity, local banks benefit from local economic health in a very direct and immediate way.

It is important to note that the mortgage market has changed.  The only loans being originated today are of higher quality and underwriting standards than at any time in the last 15 years.   Rates are at a historic low and millions of homeowners require refinancing options.  However, a distinct threat to any recovery in the housing market lies in the lack of liquidity in warehouse lending for small business mortgage bankers.

Capacity was driven by the mega banks and Wall Street firms for the last ten years, and the housing crisis has left less than 10% of the capacity of just two years ago.  If a lender loses their line or attempts to grow and absorb market share, they face the serious problem of having to ration their ability to service homeowners in their community.   Without lending capacity, important refinances are delayed or don’t happen, and the additional disposable income available to the local is as well. Warehouse lending cannot remain a footnote to our stimulus efforts when it is the “tip of the spear” in the housing market.

Please indulge the analogy– It is like spending billions of dollars to ensure that there is an adequate supply of flu vaccine, certainly of value to public health for quality of life, productivity loss and financial reasons.  However, if at the same time, we neglect the collapse of the entire syringe and vial industry– how do you get that vaccine into the patient?  How do you realize the benefit of those billions spent on the vaccine?  The answer… you don’t… the costs of syringes skyrocket and are rationed among those who can afford them.  And just as bad, you have subverted the “public good” purpose of the funding and wasted a pile of cash.

Participating isn’t going to be a bitter pill for local banks; mortgage warehouse lending is a profitable business.   Based on short term lending of 15-30 days, it is a simple business revolving line of credit with collateral attached.    Demand has never been higher as Wall Street firms and mega lenders are forced to allocate resources to fund their retail and correspondent business.

Despite the obvious synergies between local banks and mortgage bankers, there are strong operational considerations to be addressed.  Mortgage warehouse lending has its own requirements for compliance, due diligence and production.  From collateral management to line reconciliation to technology, a local bank will have the same operational support needs as any warehouse line lender.  As such, Titan has developed an operational support platform as a variable cost solution to micro warehouse lending with specific focus on the needs of local banks.

As Americans we recoil at a policy that says:  if one of us has to sacrifice, I vote it is you.  But we can change the policy, on a grassroots level and solve the problem ourselves.  Even better, we don’t have to sacrifice our economic futures, we can make money, enhance our communities, earn a better than market return on investment.   As mortgage bankers turn more and more to their local banks for warehouse lending, Titan will lead this grassroots solution to primary liquidity.