Mortgage Industry News

Mary Kladde

In my last post I stated the following:

There’s been quite a bit of lip service given with regards to supporting small business over the last couple of weeks.  Independent mortgage bankers/correspondent lenders are representative of the small businesses in question.  ACTIONS SPEAK LOUDER THAN WORDS.  Somebody somewhere in a position of authority and influence needs to get a clue quickly before it’s too late.  Let’s remove/suspend some of the capital requirements for Community Banks and Credit Unions on Warehouse Line Lending and get the ball rolling!

Today, my call was answered:

MBA Formally Asks for Capital Cut on Warehouse Lines

The Mortgage Bankers Association has asked federal banking regulators to cut the capital requirement on warehouse lines of credit by as much as 80% to alleviate a funding crisis facing non-depositories. Currently, depending on what stage of funding a loan is in, the risk weighting on a warehouse loan can be as high as 100%. This means $8 in capital must be held for every $100 in warehouse credit outstanding. For Fannie Mae, Freddie Mae, Federal Housing Administration and Veterans Affairs loans the trade group wants the capital charge to be 20%. Non-bank mortgage lenders are seeing their lines disappear or reduced with several regional banks exiting the warehouse sector as a way to preserve capital. MBA’s letter was sent to the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision.

Mary Kladde

“Fed launches bold $1.2T effort to revive economy” (JEANNINE AVERSA, AP Economics Writer Jeannine Aversa, Ap Economics Writer)

“WASHINGTON – With the country sinking deeper into recession, the Federal Reserve launched a bold $1.2 trillion effort Wednesday to lower rates on mortgages and other consumer debt, spur spending and revive the economy.

To do so, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.”

This move by the Fed will do nothing for the Primary Mortgage Lending Market if liquidity does not loosen and become available for lenders other than the large financial institutions such as Bank of America, CitiMortgage, and Wells Fargo.

Consumer refinance demand will continue to peak since consumers do not understand the difference between the Fed lending rate to financial institutions and long term interest set by the primary mortgage investors.  Rates, however, will not significantly dip as intended until liquidity is infused back into the primary market.

There is not enough money in the system to allow independent mortgage bankers/correspondent lenders to service consumer demand in their communities.  They actually have to pick and choose which loans to fund at the end of the month right now.  Liquidity issues have even moved some of the remaining Warehouse Lines providers to suspending refinance transaction fundings in favor of purchase money business at the end of the month.  Warehouse Line Lenders do not have the money to fund the demand and they are making their customers choose which loans to fund and which loans to push into the next month.  This “push”, of course, often times represents loss to the correspondent lender aka “small business owner” and community employer.  Loss equals reluctance to hire and make capital expenditures which is ultimately the whole idea behind the Fed’s push right?

The “Bigs”, on the other hand, have already made it clear that there is no need to decrease long term rates since it is a matter of “supply and demand” and they can take this opportunity to shore up their margins.  Demand is up, supply is down…due to the fact that independent bankers/correspondent lenders cannot get the needed cashflow to compete….so there is really no need to lower rates for the end consumer until the playing field has been leveled again.

There’s been quite a bit of lip service given with regards to supporting small business over the last couple of weeks.  Independent mortgage bankers/correspondent lenders are representative of the small businesses in question.  ACTIONS SPEAK LOUDER THAN WORDS.  Somebody somewhere in a position of authority and influence needs to get a clue quickly before it’s too late.  Let’s remove/suspend some of the capital requirements for Community Banks and Credit Unions on Warehouse Line Lending and get the ball rolling!

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!

For someone that makes their living forecasting and predicting trends, Jim Cramer should be embarrassed.   His comment on the irrelevance of primary market liquidity is as insightful as his push to buy Bear Stearns at $60 a mere 7 weeks before it collapsed.

“Cramer: What’s going to happen to the mortgage lenders when no one will provide warehouse lines? Two more banks announced they would no longer provide warehouse lines totaling $5.4 billion and about 27% of all lines available in the market. Non-bank lenders will be done, third party originators will be done, and competition in the market will be done.

Rates will be so high that it will kill the housing market and nationalization of mortgage lending will be a reality. What are your thoughts on this issue? –Bill

Cramer says: “I think you’re completely and utterly wrong, Bill. I think that there are plenty of banks in this country. The banks will compete. I don’t like the warehouse lines. They tended to be given [in] a lot of cases to companies that didn’t do their due diligence. Now those companies need to fall by the wayside. I think banks that do mortgages and keep mortgages rather than sending them off into the nether land are the banks I want to go with. Could competition be hurt? You know what, look [at] what we just went through because competition was freewheeling – the worst housing situation in the world that gave us the second worst bear market ever.”

It underscores my argument that the intricacy of policy, regulation and legislation should be left to the professionals not spectators, ideologues and/or amateurs.  On many levels, it is like asking for a neurosurgical consult from your dental hygienist…

This comment highlights the real chasm growing between the small “b” business arm of the financial services community and Wall Street profiteering.  For many years, Wall Street prognosticators were deified as having omniscient insight into the true American dream – getting rich.   In a bear market, there was no real downside…

Here watch me do it:  Pre-requisite:  Make grotesque amounts of money siphoning off wealth from some “innovative” scheme.  Message:  Economic Boom:  Everything is appreciating… I’ve never seen so much money to be made… buy, buy, buy (read: give me as much money as you can so I can invest it and take a slice on every transaction.)    Economic Collapse:  no one could have seen this coming, it’s not my fault,  I don’t have a crystal ball, I did the best I could…. Buy, buy, buy.  (read: give me as much money as you can so I can invest it and take a slice on every transaction.)   See… where’s my show CNBC?!?

Having watched the John Stewart slugfest with Cramer, Stewart was right… it isn’t a game or entertainment.  Jim Cramer has consistently been just wrong – reminding me of that monkey and dartboard analogy from Econ 201s required reading A Random Walk  Down Wall Street.

The reality is that the only way to get wealthy (long term) is through hard work.  Watching those outtakes on Cramer, it is obvious that Wall Street has bought into the infomercial, get rich with no participation, collect checks, follow the green and red boxes in this easy software program notion of entrepreneurship.  It is fascinating because unlike EVERY small “b” businesses… they don’t actually pay if they are wrong – they get bigger bonuses.   With no down side, no personal responsibility and obscene profits on both the buy and the sell… are we surprised that Wall Street doesn’t get it?

Cramer is just towing the company line… Wall Street really believes that unless you have a “b” (for billion) on our balance sheet, you are expendable.  Small businesses are merely quaint spectators and wannabes.   Well, don’t break your collective arms patting yourself on the back for this mess we are in, but I can tell you – small business is where we will find our rescue.

There is no TARP knight to the rescue… just the same hard work we “expendable” small business types put in before, made harder by risks taken by people we will never meet.

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!