Mortgage Industry News

Ruth Lee

As several of our posts have indicated, there is a cost to the lack of liquidity in the primary market. Mortgage bankers, underfunded due to a lack of capacity in warehouse lending, are forced to ration services and fundings. The largest banks in the country are not constrained at all… as they can just go to the Fed and get an extremely favorable rate and lend away.

The good news?  Well, those struggling banks are making an absolute killing in mortgage origination… with little pressure to expand credit permissiveness or make riskier loans.  The bad news?  The borrowers – the tip of the spear in shoring up a flagging housing market – are paying the entire price…on a macro level by bailing out those banks and underwriting the entire secondary market…on a micro level with ten times the cost for each individual origination.

A recent study by the Mortgage Bankers Association showed that the industry was making a profit of over $1,088 per loan in the first quarter of 2009, as against just $148 in the last quarter of 2008. (see article)

With a competitive primary market, the larger lenders wouldn’t just have “carte blanche” to increase fees….because remember:  competition is good.  The warehouse lending climate is definitely opening up…more participants are having real discussions about entering the market every day; however, a tenfold increase in profitability in a single year just underscores why it is so important…why it is so urgent.

I read an article recently that posited an interesting question…does the market need 8000 mortgage bankers?  In reality, that is only around 160 mortgage banker per state.  When seen in relation to the 1.3 million realtors in the US, who only handle purchase transactions and the news evidenced in this article, I think the answer is a resounding yes… and perhaps 8000 isn’t enough.

The warehouse liquidity crisis is expanding and, according to this week’s story in MBA Newslink, starting to affect the broker to banker transition:

The mortgage industry faces a paradigm shift as warehouse lending dries up, wholesalers shut down and mortgage brokers turn into branches.

“This is an industry-wide problem,” said David Zugheri, co-founder of Envoy Mortgage, Houston. “Warehouse lending is down 90 percent by a number of participants, and the total amount of funding by 75 percent.”

Zugheri said a mortgage banker, once able to receive a $20 million line of capital with $1 million will likely receive nothing now with $5 million.

“We see that [problem] causing a lot of consolidation,” Zugheri said. “The bigger companies will get bigger, and the logical step for the smaller company will be to merge up into one that might make it.”

“We’re definitely seeing the move of branches to larger companies,” said Brian Lynch, president of Advantage Systems, Irvine, Calif. “The old deal of [mortgage] brokers becoming bankers–that is not happening because of this warehouse issue.”

Read the full article here. We have also explained how the warehouse liquidity crisis has affected this process on our website:

“Transitioning from “broker to banker” has always had an allure for those prepared to contend with added responsibilities, risks, and resource requirements. Tightening restrictions on brokers’ eligibility for opportunities to earn a profit and the massive exit of viable wholesale investors from the market has created an environment in which the move from “broker to banker” has become increasingly more attractive and possibly a necessity rather than a choice.”

Read more about the broker to banker transition and the nest steps for mortgage brokers in this economy, visit http://titanlenderscorp.com. Our warehouse lending solutions are keeping us busy with inquiries, but we promise more updates coming soon!