Mortgage Industry Insights

Titan’s Ruth Lee was featured in this month’s Secondary Marketing Executive explaining what the mortgage industry needs to do to solve the current warehouse lending liquidity crisis (”Market Insight: A DIY Approach to the Crisis”):

 ”Another new company in the warehouse sector is Titan Lenders Corp., based in Denver. Ruth Lee, vice president of sales, echoed [Jerry] Davis’ concerns by calling for a “grassroots” effort to unplug the warehouse lending logjam.

“The 2006-2007 market is very much gone,” she said. “If we, as an industry, are going to wait for glacial response from Congress or the Fed, I think we’ll be missing the boat. I think that we, as an industry, have a responsibility to fix the problem, because it doesn’t seem like there is any big watershed of interest coming about.”

Lee added that time is not the industry’s ally. “We are watching companies that are desperate today,” she said. “They need the warehouse line - it is a business-ending event. Right now, there’s not much out there.”

We will stay on the forefront of the discussions and keep pushing for necessary, intelligent action in this area. More updates coming!

Titan Lender’s Corp. President Mary Kladde discussed extending warehouse line capacity with Tony Garritano for the feature article of Mortgage Technology magazine’s May issue:

 ”Traditional warehouse lenders aside, for new entities looking to provide warehouse lines and make a profit, like private equity funds for example, business process outsourcing firm Titan Lenders Corp. sees the lack of liquidity as an opportunity. Earlier in the year, Titan launched a warehouse lending operations service platform that can speed private equity fund entry into a structured investment that collects interest at approximately 3 to 5 basis points per diem for a 15- to 30-day duration. GMI Home Loans, a New Jersey retail mortgage banker originating approximately $500 million per annum in conventional, FHA and reverse mortgages, encountered liquidity challenges soon after its launch in 2007 when access to warehouse line facilities began shrinking industry wide. GMI turned to NVC Premier Fund LLC, an entity managed by New Vision Capital Partners LLC, for its funds, and worked with Titan to develop a warehouse line process management platform.

“Our customers are small and midsized lenders,” said Titan founder and president Mary Kladde. “They’ve seen a huge reduction in warehouse lines. As a result, they were contacting us to see what lines were still open. We also received calls from community banks and private equity groups that were looking to provide buddy lines, especially at the end of the month when lenders need that bump.

“We signed an independent mortgage banker that reached out to their contacts and brought a private equity group onboard. However, the private equity didn’t just want to turn over the funds, they wanted diligence. We were selected to do that on their behalf. The capital investment to build the technology to diligence a loan would be prohibitive for a private equity firm, which is why we got involved. I don’t think Wall Street is going to pull us out of this, but there is opportunity for other institutions. Will they all come in? I don’t know if companies are willing to come in and do something news, but some are. I think there’s a lot of interest out there.”

Read the full article here: “Extending Warehouse Line Capacity“

GATEWAY IS DOWN BUT BY NO MEANS OUT – Understanding the internal crisis for warehouse lenders

Ruth Lee

Quite often I have discussions with IMBs that are bewildered by the market for warehouse lending.  While profitable and low risk, they are astonished by the “shoulder shrug” the industry has given to warehouse capacity.  As I have mentioned on many occasions, survival in this market will not be by accident.

“Why can’t the current warehouse lenders just give me a larger line?  Why are they reducing my line commitment while increasing my approval requirements?”

Gateway is a prime example of the stresses that mortgage bankers are under.Gateway received a Cease and Desist order from the OTS addressing their need to maintain sufficient capital to support their current business channels and requiring a review of their “business plan.”  That doesn’t mean that Gateway is going away, but it does highlight that our warehouse lenders are under significant pressure to restrain growth.  While I wouldn’t be holding out grand hopes of quick approvals, with a $10K application fee, Gateway has an upfront reality check – literally.

Chase Changes Its Mind, Will Stay in Warehouse
National Mortgage News (05/11/09) Vol. 33, No. 32, P. 1; Muolo, Paul 

“JPMorgan Chase has decided not to exit the warehouse lending business after all but now will provide lines of credit only to certain customers that sell loans to it on a correspondent basis. The firm in 2008 purchased the warehouse business of Washington Mutual, which had just 10 customers left when JPMorgan Chase announced plans to pull out of the niche. A company spokesperson said it now will serve only a subset of these 10 customers.”    

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WAREHOUSE LENDING UPDATE:

Chase correspondents must have began to notice that delivery was destined to suffer as independent mortgage brokers lost more and more warehouse capacity.  If mortgage bankers don’t have the funds to disburse loans, it makes it really hard to sell to correspondent investors.  Those correspondent executives must be putting pressure on their commercial lending divisions to at least extend funds to their “best” clients… 

As a trend, several larger lenders are deciding to “remain” in warehouse lending by offering lines of credit to their largest correspondent lenders – with some pretty hefty restrictions on where those loans can be delivered.   Every time one of these companies sends out a press release –hundreds of mortgage bankers pick up their phone hoping for relief… but they are not offering warehouse lending to the market at large.  Wachovia, GMAC/RESCAP, and Chase (and a few others) are taking care of long-standing customers that deliver volume to their correspondent channel.  I even received an email forward indicating that only companies with a correspondent Senior VP level recommendation would even be considered as an applicant.  Perhaps in the “bigs” jockeying for market share, they will start to incent loyalty… however, it is my understanding that today they know they have their clients “over a barrel” changing conditions, terms and restrictions on lines with little notice.  Many bankers remain insecure about their line and how to price with net worth, cash reserves, haircuts a moving target.  While by necessity many bankers are grateful for any capacity… you can sense that those bankers remaining in the market, ones that have proven their worth as businessmen and women, are becoming disenchanted with expectation that they genuflect to their business partner and pay homage to their generosity. 

For lenders that don’t have long standing correspondent relationship with one of the big lenders, well… you still have a few options.  First Tennessee – under the stewardship of a very conservative Bob Garrett  (say what you want about his iron fist on approvals – but they didn’t miss a beat during this meltdown – and I am sure his current clientele is very grateful)… Comerica – whose net worth requirements increase on a weekly basis in response to swelling demand – I think they are now looking at a $5mm minimum net worth.   Sovereign – who I heard came out this week and know little about… Gateway Bank – with a sizable non-refundable app fee and some pretty directed back end requirements… Silvergate – don’t call them unless you are a local CA banker… Tier One… another I don’t know about but have heard conflicting reports about their taking applications.

Titan is in negotiations with a few regional banks that are interested in offering warehouse lines.  While some will be national, most are just looking to shore up one of their customers, and we are managing the line for them.  This means that things will start to ease… however, I believe that we are not going to see a fair normalization until at least next year.  My best advice to anyone looking for capacity – be creative… think short term survival…  

Wow, I am starting to have de ja vu.

All of the things we have been saying about the current warehouse lending crisis and actionable solutions to the problem keep popping up in the industry press. But I am glad that our message about the liquidity crisis and the need for a national warehouse line solution are getting out there, and in a big way.

We had several meetings in Washington last week and were pleased at how receptive and enthusiastic legislators were to hear what we had to say, learn more about the problems and work to develop real, applicable solutions. Updates on those meetings and our plans coming soon. In the mean time, here is a snippet from the MBA’s commentary on the current warehouse lending situation, cited from this week’s MortgageOrb/Secondary Marketing Executive:

“Just when one might think the current crisis facing mortgage banking cannot get any worse, along come the problems facing the warehouse lending sector. At the recent Mortgage Bankers Association (MBA) National Secondary Market Conference, the perilous state of warehouse lending and the possible solutions were discussed.     

“Michael Carrier, associate vice president for secondary markets at the MBA, argued that the warehouse lending dilemma will create additional problems for independent mortgage banks struggling to stay afloat.

“There is a perfect storm for non-depositories that rely on warehouse lenders for their funding,” he said. “We have consolidation in the industry, so there are fewer and fewer players out there. We have existing warehouse lenders terminating their business because they are about to reduce risk and reduce costs, and the ones keeping the lines open are putting more restrictions on it and making it more and more difficult to obtain lines of credit.” 

“Carrier blamed the overall state of mortgage banking as having a damaging effect on the warehouse sector. “The reason many people say they are getting out of the business is because anything associated with a mortgage is a four-letter word,” he continued. “The risk-based capital charge associated with a warehouse line is so much higher than mortgages, so it is easier to clean up your balance sheet by getting rid of warehouse lines. But that’s not much comfort for the thousand or so non-depository independent mortgage bankers that rely on warehouse.” 

“Carrier pointed out that the situation will limit attempts to revitalize both the industry and the overall housing market. “About 25 percent to 40 percent of all originations come from independent mortgage bankers, and 55 percent of Federal Housing Administration originations from these sources,” he added. “With fewer originations now, there is higher volume for commercial banks, so they are raising their rates and fees in order to slow down volume. That is not helping consumers.”  

“MBA has gone on road shows to various financial regulators,” he explained. “We started with the [Federal Deposit Insurance Corp.] (FDIC) and met with Chairwoman Sheila Bair. We said that they issued a financial institution letter that said, ‘Don’t stop lending to creditworthy borrowers.’ We then said that warehouse lenders are creditworthy borrowers - so why doesn’t the FDIC issue an updated financial institution letter that emphasizes warehouse lending? She expressed absolutely no interest in this, pointed a finger and said, ‘Why don’t you talk to the other banking regulators?’  

We have several exciting prospects in the works, and are actively discussing new legislative initiatives with Washington lawmakers. We are working to show them both how current legislative initiatives are addressing problems that no longer exist, and to also turn their focus to the critical issues that need to be addressed now to move the mortgage and housing industries back to a place of strength, health and quality. We will keep publishing details as we move forward. Stay tuned!

Warehouse Lenders - Active TAKING APPLICATIONS:

• COMERICA - minimum net worth of $5MM.  Very selective with little pull through.
• FIRST TENNESSEE- minimum net worth of $500K.  Very selective with little pull through.
• TIER ONE - relatively unknown.  No website.
• USBANK - Doesn’t advertise lines. Only goes for the “big” players with heavy delivery to USBANK
• GATEWAY BANK - Training Line with multiple investors
• FIRST FUNDING - Training Line with conduit directly into Flagstar
• WACHOVIA/WELLS FARGO - Just started taking applications.  Tentatively may become a larger provider.
• VIEW POINT - minimum net worth of $1M. 

CAPTIVE LINES:  Require a specific delivery percentage to their correspondent division.

• GMAC
• COUNTRYWIDE
• FLAGSTAR

NOT TAKING APPLICATIONS

• Natty Mac
• Colonial Bank - critical to the survival of Franklin American and Taylor Bean and Whitaker
• Texas Capital Bank
• Southwest Securities
• Town North Bank - very small player
• First Star Bank - small player out of TX

ADDITIONAL NOTES: Two more lines have emerged just in the last week.  Silvergate out of CA, which is focused on CA only for now, and ResCap. 

ResCap Expanding Warehouse & Jumbo, Bank deposit growth fueling expansion, April 17, 2009 (By MortgageDaily.com staff)

“Residential Capital LLC’s warehouse unit has hired a new chief to oversee an expansion of the business. In addition, the lender plans to step up its jumbo offerings. A healthy pace of bank deposit growth will fund much of the expansion. 

“Two weeks ago, Adam Glassner was hired to run ResCap’s warehouse operations, Jeannine Bruin, a spokeswoman for parent GMAC Financial Services, told MortgageDaily.com in an interview today.

“Adam Glassner was brought on board because he has considerable professional experience in warehouse lending,” Bruin said. “He was brought on to lead our warehouse lending team, to expand that team and to oversee the expansion of volume.”

“The spokeswoman explained that demand for warehouse financing has increased as the number of players has diminished, creating “a really good opportunity.” In addition, the expansion supports the Obama administration’s policy of making mortgage credit available.”

This presentation explains warehouse lending, problems with previous warehouse lending methods, and Titan’s approach to the warehouse line lending process:  

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.

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!