Ruth Lee
Colonial is/was one of the largest participants in warehouse lending- but not for long, judging by their recent fiscal results and the search warrants they were served by the SIGTARP Monday. While today they are “business as usual,” mortgage bankers across the country are scrambling to obtain additional capacity. Why the search warrants? The answer is unclear; however, I am guessing that the expansion of the False Claims Act and the passage of the Fraud Enforcement and Recovery Act in May has something to do with it.
The FCA, which provides for civil penalties and criminal sanctions against individuals or companies that knowingly make false statements in order to receive funds from the federal government, is a valuable tool in combating TARP-related fraud. In addition, the FCA allows private "whistleblowers" to sue on behalf of the United States as "qui tam relators" and to thereby receive 15 to 30 percent of any damages recovered. (The NY Law Journal: "Potential Claims From the TARP Program")
While the search warrants may not be related, they were delivered by the SIGTARP rather than the Colonial banking regulator. Is this the coup d’gras for Colonial?
- In July, they received a cease and desist order from the FED saying that their capital reserve requirements had not been met.
- Colonial tried to structure a capital acquisition deal of $300 million with Taylor Bean and Whitaker and a group of investors. That deal was set to expire on July 31st if a deal could not be reached. To the industry’s horror, the two titans announced the actual expiration of the agreement last Friday.
- Florida was a really, really bad market. In Q2 Colonial posted a loss almost three times that in Q1…$606 million vs. $168m… mostly due to their heavy investment in commercial real estate development in the “sunshine” state.
- Last week Colonial received another cease and desist regarding their capital reserve requirements.
- They are trying to sell, but they dont’ think it’s going to happen in any reasonable amount of time.
- Colonial admits that they don’t believe they will continue as a “going concern”
See the Colonial press release here: ”Colonial BancGroup Reports Second Quarter 2009 Results“
What does the Colonial implosion mean for the market?
Press Release on a Colonial/Taylor Bean customer website:
ANNOUNCEMENT 09-21
AUGUST 5, 2009INDUSTRY EVENTS
The unfortunate and sudden HUD suspension of TB&W is a significant industry event which will have far-reaching implications. One of those implications is the displacement of the enormous volume TB&W was originating each month, as they were the third-largest FHA lender in the nation. As the industry attempts to absorb this volume, it is likely there will be noticeable disruptions in all areas of production. We believe there will be three main affected areas: (1) Pricing: pricing may increase as a result of the increased volume, since all major lenders are already operating at or above capacity. (2) Risk Analysis: risk tolerance may again decrease as lenders react to this latest headline. (3) Warehouse Availability: increased vigilance by warehouse lenders may result in additional underwriting guidelines, a reduction in underwriting exceptions, and potentially even less warehouse availability than there is now.
Since Security Atlantic is already operating at capacity, we will likely be affected in all three of these areas. Consequently, we are not in a position to underwrite and close any substantial portion of the current or projected TB&W pipeline.
Additionally, Colonial Bank, one of the largest warehouse lenders in the country, was a major source of financing for TB&W. The ramifications of this relationship, if any, have yet to be determined. However, it is important to note that any negative impact on Colonial Bank would likely exacerbate all of the potential issues described above.
We are hopeful that the industry will stabilize sooner rather than later.
If you have any questions, please contact your AE. A list of AE contact numbers can be found here.
Thanks,
Noel M. Chapman, EVP
If market estimates are correct that there is between $20-25 billion in capacity, down from $200 billion just two years ago, then Colonial, with an estimated $4 billion in warehouse lending commitments, represents approximately 20-25% of total current warehouse lending capacity. Additionally, it’s not like Colonial can just get replaced… that some bank will rush in to fill the vacuum. The Colonial client list was a who’s who of mortgage banking and wholesale, starting with Taylor Bean and Whitaker. Face it, if Taylor Bean could have found another option than Colonial – they wouldn’t have been putting together $300m in investment into the struggling bank. The market is NOT flush with big cap lines or warehouse lenders aching to take on TPO/wholesale risk.
This couldn’t come at a worse time for the industry, as many of the extensions on the National City lines are expiring. I have heard of possible further extensions… but I don’t know that that isn’t “wishful thinking.” The reality is that of the remaining capacity, there aren’t a lot of “risk takers” in warehouse lending…mavericks looking to reinvent a market with bold vision and a devil-may-care view of risk mitigation.
And those dollars are not being pushed toward wholesale funding. Most of the banks that are participating are medium sized banks that just cannot offer huge lines considering their maximum lending limit. Companies that fund $100 million per month can theoretically get 10 $10 million dollar lines; however: a) there only a handful of lenders b) most of those that are around aren’t willing to allow them to wholesale; c) the cost of funds is not going to be as aggressive or friendly for arbitrage as they had before.
There may be some institutional relief on the horizon: James Lockhart, director of the Federal Housing Finance Agency, said in an interview Monday that he expects an announcement this month that Fannie Mae and Freddie Mac will provide support to "warehouse" lenders. Mr. Lockhart said the aid would involve the use of commitments by Fannie and Freddie to purchase loans that serve as collateral for warehouse lines of credit. This would provide welcome relief for the independent mortgage banker. (WSJ Article)
What we really need are some new warehouse lenders…
I saw a quote in the Mortgage Technology piece that referenced the “surplus capital” that many community banks are enjoying, but this has NOT been my/our experience with banks that have not received TARP funds. Most of them are seeking capital acquisition strategies to fund their ability to grow. For most community banks, the investment climate is dehydrated and investor confidence is very, very low… while a bank can become hyper-capitalized through reception of TARP funds – most have to scramble to recruit capital to make them TARP eligible. Even those banks that do find themselves with a little extra capital are definitely not throwing it around in an orgy of growth – because today their reserve requirements are uncertain, almost capricious. A bank is aware that they can be well-capitalized today, but they are just a few losses and a regulator decision away from being upside down next quarter. Unlike those big banks that were compelled to take TARP funds and are rushing to pay them back to avoid the “strings attached,” regional and community banks have to ration their growth to ensure that they will survive.
So what the heck happened with TBW?
The third largest FHA lender in the country has been suspended from making FHA loans. It seems that when some of your C-level management make false or misleading statements regarding your financials, both GNMA and FHA take a dim view of it. The saddest part is that much like hundreds of other imploded lenders – there are a lot of good, quality people that will suffer because of what can only be seen as the desperation of a few. While TBW has a month to appeal, you can almost sense the panic among FHA correspondents (see above). Additionally, TBW had long standing partnerships with credit unions and community banks across the country. For months, these newer mortgage bankers have been seeking alternatives – because of the funny business surrounding funding… but this is going to cause an exodus heretofore unseen. These banks and credit unions used TBW for everything – through TB Direct, but I can say from experience, community and regional banks are risk averse and shun bad PR… I just don’t see them standing by TBW through this debacle. Today TBW announced that they were suspending all operations. Within hours, I was receiving calls from clients looking for an additional place to park their loans that have already been locked and underwritten at TBW.
