Mortgage Industry News

Mary Kladde and Ruth Lee

The mortgage market is disintegrating under liquidity constraints in the primary (origination) market.  Wall Street’s loss of confidence with their investors isn’t being reversed by massive infusions of bailout money.  Property values continue to sink and the impact on local economies is profound – equity loss, property tax loss, job loss, loss of consumer spending, business closure – these all serve to exacerbate and accelerate this recession.   The Economy isn’t Wall Street, or at least that is not where most of us feel it… it is right here in our homes, neighborhoods and towns.  With time and billions more to Wall Street, we will see a painfully slow reversal, but can we really afford to wait?

Long conditioned to determining economic health based on the rise and fall of the Dow, the small business arm of financial services are allowing the focus to remain macro – when it really needs to be micro.    The answer isn’t thinking bigger, rather thinking smaller and turning to the only stable financial quarter in our economy with capital, the community bank and credit union.  These banks have capital to lend; however, the experience gap for safe warehouse lending in the mortgage market can be a significant barrier to market entry.  As a solution, Titan has established a service platform directed at supporting warehouse lending operations focusing on due diligence, compliance and profitability.

Since Titan’s calls last month for attention to the liquidity problems plaguing the primary market, we have received unprecedented interest in our position, blog and services.   This is precisely because there are hundreds of small business owners facing their own certain demise if the unthinkable happens, if they lose their warehouse line- often a business ending event.  The remaining mortgage bankers have good business models, based on long term growth through servicing their community.  Today, they are facing the serious problem of having to ration their ability to service homeowners in their community.  A solution is critical.

Community, regional banks, and credit unions, much 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, the community bank and credit union directly benefit from local economic health in a very direct and immediate way.

In a deepening recession, there aren’t very many viable investment options for local banks.  Wall Street offers little promise or security; fraud is rampant, losses epic.   Consumer credit and auto loans are a complicated choice of risk versus return.  Commercial lending is difficult to justify in a contracting economy.   In discussions with mortgage bankers, they often have access to a local bank that is tentatively willing to offer warehouse lending.  These banks are beginning to recognize the significant profit center that warehouse lending would offer, and the concurrent benefit of strengthening their local economy.

Despite the obvious synergies between local banks and mortgage bankers, there are strong operational considerations to be addressed.  These banks are reticent to enter an unfamiliar market with little or no operational or technological support.  From collateral management to line reconciliation to technology, a local bank will have the same operational support needs as any warehouse line lender.  Titan’s service platform provides a variable cost solution to micro warehouse lending with specific focus on the needs of local banks.  As mortgage bankers turn more and more to their local banks for warehouse lending, Titan will lead this grassroots solution to primary liquidity.

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!

The warehouse line lending solution to mortgage industry liquidity issues has definitely started gotten the attention of the mortgage industry. Coverage is spreading like wildfire! Here are some updates today. First, we are featured on the front page of MortgageChronicle.com:

Firm Aims to Boost Warehouse Liquidity
Titan Lenders Corp. launched a warehouse lending platform to help community banks and credit unions enter warehouse lending, a press release stated. Titan said financial institutions can replace deteriorating revenue with income earned from financing originations for mortgage bankers. In addition, the institutions will boost economic activity in their communities by providing warehouse financing to local mortgage bankers.

And, we just found out we were featured in American Banker and National Mortgage News:

Small-Bank Warehouse Facility
Titan Lenders in Denver has started a service platform for warehouse lending operations to ease community bank and credit union entry into warehouse lending…

The issue is certainly timely and the need is great, as today’s Mortgage Implode-O-Meter reinforced:

“Clients of warehouse lenders Guaranty Bank and National City (PNC) were called with the news today that they intend to exit their warehouse lending lines of business. Both banks intend to phase out their mortgage warehouse lending operations, taking the same non-renewal approach as client contracts expire over the next 12 to 18 months.

“Guaranty Bank reportedly has $1.1 billion in outstanding commitments. With National City’s $4.3 billion, the two banks comprise an estimated 27% of all warehouse lending volume still in existence — and a huge blow to non-depository lenders who rely on these lines-of-credit to fund loans for their clientele.”

We’re not the kind of people who would say ‘I told you so,’ but if we were, now is when we’d say it. More updates soon! Mary and Ruth

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.

Liquidity issue gaining more and more traction! Possible relief in sight.  Industry media is really starting the carry the ball on the topic (but only after we mentioned it first!). Here is the first article from the MBA Newslink:”MBA Proposes Backstop for Warehouse Lines”:

 ”[John Johnson, CMB, president of MortgageAmerica Inc., an independent mortgage banker in Birmingham, Ala., and head of the Mortgage Bankers Association’s warehouse lending committee] and MBA staff met with the Treasury Department last Thursday to propose a $30 billion backstop to guarantee warehouse lines of credit and “liquefy the business that existing warehouse lenders are doing.” TALF could be used in that source of funds to assist in liquefying the market, he said. On Friday, Johnson and MBA met with Federal Reserve staff.

“Johnson said federal government funds would not provide warehouse lenders with a “bailour but instead would create an interim mechanism to begin manufacturing liquidity back into the mortgage market.

“This would make it a government-guaranteed security. It would liquefy and bring new participants to the market and free up capital for the existing warehouse lender,” Johnson said.”

Read the full article “MBA Proposes Backstop for Warehouse Lines.” From National Mortgage News, “What We’re Hearing” by Paul Muolo for the paragraph that begins with:

THIS JUST IN: The Government National Mortgage Association might be open to providing (in some manner) warehouse financing to non-depository mortgage banking firms, helping alleviate the credit crisis in that sector. GNMA isn’t ready to talk about it but there are rumblings out there. Meanwhile, some regional banks are warming up to the idea of becoming warehouse providers, one investment banker told us. These banks understand that the profit opportunities in warehouse could be quite good. “I know one Illinois bank that’s looking at it but they only want to lend in their state,” said a source. “They’re telling me: ‘If it’s not in my backyard I don’t want to do it.’”

On the other hand, The Christian Science Monitor also published an article, “As big banks falter, community banks do fine“, which points out that smaller banks did not make the same mistakes that larger banks did, such as investing in risky mortgage backed securities or complex derivatives, but instead kept their assets local. As such, these banks are doing well and are anxious to separate themselves from the big banks that are creating such a negative perspective of the banking industry.

“While they account for less than 10 percent of America’s total banking assets, their traditional, values-based approach contains plenty of lessons for their larger Wall Street counterparts, some analysts say. Some also question the wisdom of allowing a few big banks to control large percentages of the US banking sector.

“Mr. Potter must be spinning somewhere in his celluloid grave,” says John Steele Gordon, a business and financial historian in North Salem, N.Y. “The community banks are doing well because they were willing to adhere to sound banking principles. They didn’t get caught up in the Wall Street craze and were less driven to keep those quarterly earnings going up and up and up.”

“Yet the community banks are interested in making a profit. Like the Connecticut River Community Bank, which had its best year ever in 2008, most do it in the traditional way: They focus on their “net interest margin” – the difference between the interest earned from loans and investments they make, and the money paid out to depositors.

“But there’s another component as well, says William Attridge, president of the Wethersfield, Conn.-based bank: Most community bankers know their customers.

“We’re lending to small businesses, and in small businesses the individual is a significant part of that,” he says. “There’s a character component: That means we might make loans that possibly someone else wouldn’t if they just looked at the financials, because we know the individual well and what their resources and talents are. On the other hand, there are probably some [loans] that look good on paper that we wouldn’t make.”

We will keep following the growing coverage on this issue and keep you posted on our efforts to keep bringing smart solutions to the mortgage industry crisis to light.

Mary Kladde

This is another article we wrote earlier this year to address some of the primary concerns we see for the mortgage industry, such as national liquidity, mortgage technology adoption and quality production.

TIMELY ACTION IS REQUIRED:

With an economy in crisis, liquidity unable to meet demand and a pillar industry like housing in ruins, action is required.  The government has a unique opportunity with its newly minted FHFA and control of the GSEs to establish some standards for the industry as a whole, revolutionize it with current technology.  When or if those institutions return to the private sector, the real changes we could affect would revolutionize the industry saving cost (which are always passed on to the consumer), redundancy and confidence in our product.

The market has not responded to rising underwriting requirements or the elimination of all but most standard loan products because investor confidence has been sorely shaken.  To affect both a short and long term solution, we have to find the means of restoring that confidence in the value of quality American mortgage loans, and the more we delay, the longer we protract this market contraction.
Continue reading »

Mary Kladde

It’s finally happening and we are getting some traction!  After speaking with the Wall Street Journal and introducing the topic last week along with the subsequent testimony of John Courson (MBA President and CEO) to the House Finance Committee, lack of access to Warehouse Line Lending for independent mortgage bankers is finally getting some much needed attention.  Reference the article below by James R. Hagerty and Ruth Simon:

 “While Financial Giants Get Help, Smaller Home Lenders Say They Are Being Starved of Credit”

Small mortgage lenders are pushing for a slice of the federal support that is propping up giants like Bank of America Corp. and Citigroup Inc.

“These lenders, known as mortgage banks, say they are being starved of the credit they need to make home loans, reducing competition in a mortgage market increasingly dominated by a few giant banks, led by Bank of America, Wells Fargo & Co., J.P. Morgan Chase & Co. and Citigroup.

“As mortgage banks close or face credit constraints, competition to offer the lowest rates and fees is becoming less intense. “If I can only make 10 more loans, do I really want to price them at the most aggressive rate I can to get the business?” asked Jay Brinkmann, chief economist of the Mortgage Bankers Association. Guy Cecala, publisher of Inside Mortgage Finance, a trade publication, estimated mortgage rates for consumers are 0.25 to 0.5 percentage point higher than they would be if the market were as competitive as it was a few years ago.

“Mortgage banks often are small, family-owned companies. Unlike commercial banks or thrifts, they aren’t licensed to take deposits and so don’t have that source of money for their loans. Instead, they typically borrow money for the short term from so-called warehouse lenders. They use the short-term credit to provide 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.

“During the housing boom, Wall Street investment banks and many large mortgage lenders were eager to provide these warehouse lines of credit because mortgages were seen as a safe, lucrative investment. Now that house prices are falling and defaults soaring, many of those big institutions have stopped making warehouse loans or have cut back on that business.”

Read the full article “Mortgage Banks Push for Federal Support“. I for one am glad to see this “sleeper” issue is being brought to light. More commentary coming soon!

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.

Continue reading »

Mary Kladde

Instead of continuing to dole out TARP funds to financial institutions only interested in self preservation or purchasing other like entities, why not use the funds as intended by actually providing a credit facility for the primary mortgage market?   Today there are less than 5 warehouse lenders I can name still taking applications.  With the loss of industry titans, like First Collateral, Countrywide, National City, WAMU etc… the need hasn’t gone away for warehouse capacity, but the options have.

We have seen a virtual blank check to the world’s largest lending institutions in the secondary, but a complete neglect of role of the primary in this recovery.  Lofty goals to stimulate the housing market through rock-bottom rates cannot work without the concurrent support for those originating these loans at the borrower level.   If there is no money to fund the loan after closing, well, that makes a refinance into a better rate very difficult.  It makes selling your home on a short sale to avoid foreclosure more of an endurance race than a solution… hoping that even worthy borrowers will be able to finalize the purchase on time.

Since the state of our overall economy and the subsequent agreement of the majority of our elected officials has determined it necessary to insert our government into our financial markets, why don’t “THEY” go a step further, get a little closer to the frontline, and do it right?

I believe all of us in the industry (right at this moment) are experiencing a quasi mini boom due to the incredibly low interest rates currently being offered.  Potential borrowers are clamoring for the opportunity to lower their payments.  And these borrowers are not the troubled “subprimers,” they are the “backbone,” reliable homeowners that carry our economy and have FICO scores over 680.

The problem at the moment is that lenders can’t meet the business demand.  Not because they don’t want to…. Believe me after the last year and the purging that the industry has gone through, the good lenders hanging on by their fingernails want to service their customers and any new potential customers that are available in any way the can.

The problem is they don’t have the cash or access to short term capital that is needed to fund all the loans.  Lenders can’t fund loans because Warehouse Line Lenders (lines of credit used by mortgage lenders for short term financing) are all but becoming extinct.  The few that are still actively functioning are operating very successfully, but they have reached maximum capacity while demand for their services continues to increase exponentially.

All this being said, I PROPOSE…..that instead of giving TARP funds to individual companies that can’t be controlled or take direction, the “FEDS”, under the direction of the FHFA or some other specially created managing body, should use the money to create a nationally subsidized Warehouse Line Provider.

Think of it…existing Correspondent mortgage lenders in good standing could immediately access the needed line extensions or obtain a new line to meet the demands of the market.  Then, only high quality, thoroughly audited and compliant loans would be funded through these lines.

Additionally, the pool of funds used to finance this warehouse line concept would continually turn and replenish itself every 15-30 days when the loans are sold to the purchasing investor.  And let me not forget to mention the fact that traditional warehouse lending fees and interest would be charged to the participating lenders for their use of the funds.  This would thereby generate income that could be used to subsidized other government programs.

Under this concept, Taxpayer money would cease to be spent never to be seen again by only but a few.  But instead…..would immediately show a return on investment and potentially lessen the overall burden by producing revenue for the government.

The idea is a simple one born of common sense.  The question is …..Can anyone in our government take up this simple common sense solution and champion it?

All this idea requires is a good management team that understands the intricacies of the mortgage industry and the overall loan process from beginning to end and MONEY.  I can supply the management team, but where the MONEY comes from is the question of the hour.

Considering the government’s willingness to give away money to losing enterprises for capitalization of some very nice golden parachutes over the last several months, THIS IDEA IS A REAL WINNER IN COMPARISON.   No golden parachute required.