Mortgage Industry News

Make sure to grab your January copy of Secondary Marketing Executive to read Mary Kladde’s latest insights on the status of the warehouse lending market and opportunities for independent banks and community banks to engage in warehouse lending through local warehouse lines!

WAREHOUSE LENDING - Infusing New Life (And Money) Into Warehouse Lending: Industry experts are aiming for increased activity from existing warehouse lenders and new participation from community banks

Learn more about Titan’s warehouse lending approach and services here!

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.

Warehouse line relief is coming in small waves, but only for the big banks, despite the fact that small and community banks (as we have consistently been pointing out) are the most stable, have greater trust from their customers and would benefit the most from a solution to the warehouse liquidity crisis!

Read our recent article in Mortgage Orb: “REQUIRED READING: How Independent Mortgage Bankers Can Survive The Warehouse Crisis“

Restoring the productivity of the U.S. mortgage marketplace is a critical, perhaps linchpin, element of both domestic and global economic recovery.Despite conditions ripe for our industry to experience resurgent and restorative volume, independent mortgage bankers have been restrained by a massive retreat from warehouse-line lending. (More)

Despite recent lobbying efforts and legislation, changes thus far have done nothing more than bolster the big banks whose stability has been questionable for some time. ”Big Bank” lenders saved by Troubled Asset Relief Program (TARP) allocations are gaining market share, which poses a dangerous imbalance to our recovery and long-term financial sustainability. From the MBA:

MBA Keeps Up Pressure on Warehouse Lending
Sorohan, Mike

More than 90 percent of warehouse lending capacity has disappeared in the past few years–an issue the Mortgage Bankers Association has made a priority in communication with policymakers and legislators.

Last week, MBA stepped up those efforts on two fronts. On Aug. 27, MBA and the Warehouse Lending Project, a coalition of independent mortgage bankers, met with Treasury Department officials to discuss how Fannie Mae, Freddie Mac and Ginnie Mae could help jumpstart warehouse lending activity.

Additionally, MBA last week coordinated with 17 state mortgage lending associations in a letter to the Senate, asking for their support in creating a solution that would open up warehouse lending channels.

The activity comes at a time when warehouse lending activity remains stagnant. Warehouse lending is a short-term revolving line of credit provided to a mortgage company to fund mortgages from the closing table to sale in the secondary market. It is the mechanism by which virtually all non-depository mortgage bankers fund loans that are eventually sold into the secondary market to Fannie Mae, Freddie Mac and Ginnie Mae. Today, loans originated through warehouse lines are responsible for at least 25 percent and as much as 40 percent of all residential mortgages, including more than half of all Federal Housing Administration loans.

MBA estimates that the number of active warehouse lenders declined from a peak of more than 115 in 2005, to fewer than 30 today?The total aggregate capacity of warehouse lending credit has declined to about $25 billion, down nearly 90 percent from the level reported in 2007. (more)

Here is more recent mortgage industry news concerning warehouse line lending which outlines the problems for smaller banks:

NATIONAL MORTGAGE NEWS: September 21, 2009Warehouse Squeeze Eases—but Only for Bigger Players

Banks are becoming somewhat more willing to provide warehouse lines to larger and medium-sized players, but it remains difficult to say when and if lines will be again be available for “mom and pop” mortgage brokers and other small originators that are among those hardest-pressed by regulation and the downturn.

For relatively small players, the warehouse lending situation has “gotten worse, not better,” according to Scott Stern, CEO of Lenders One, St. Louis, a cooperative aimed at giving its members the collective scale they need to compete in the market effectively.

As a result of this situation, brokers’ and smaller players’ main career alternatives on the origination side of the business in the near term may continue to be either collectives that aim to preserve their autonomy while supporting and sharing in the profits from their efforts (sometimes referred to as “branching” operations) or joining a lender’s staff.

Warehouse line availability today is “driven by net worth and line size,” Mr Stern said. “Unless you need a $100 million line and have a $10 million net worth, [warehouse lines] are getting harder and harder to find.” (more)

Small banks fail in big numbers

Left behind in finance revival
The Washington Times
By Patrice Hill 

While attention has focused on the improving fortunes of the nation’s largest banks and Wall Street firms, an increasing number of smaller banks have succumbed each week to a slow tidal wave of defaults on consumer and business loans. (more)

More updates soon…

(Conclusion from a previous post here)

Instead of allocating TARP funds to larger lending institutions that are not necessarily motivated to extend warehouse lending lines of credit as evidenced by the closure of so many within the last year, TARP allocated funds could be managed in a way that would allow middle market and small lenders access to funds to continue doing business.  This aid would serve to allow these lenders to support and bolster lending within their local communities. The federal government could earmark TARP funds to create a nationally subsidized warehouse line provider or they could allocate these funds to a few different regional banks with the express purpose of supporting warehouse lending for independent mortgage bankers.

The idea is a simple one born of common sense. 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. The risk exposure would be extremely limited, in that the line is a short-term extension of credit that will replenish itself every 15-30 days as loans are sold to the purchasing investor. Further, traditional warehouse lending fees and interest would be charged to the participating lenders for their use of the funds, thereby generating income for other economic stimulus programs.

(Continued from a previous post here) 

A commercial revolving line of credit is not a complex or arcane financial instrument. The concern of most potential warehouse lenders is how to handle unfamiliar collateral – the mortgage.  Facing similar quandaries of limited expertise and unfamiliar infrastructure, other industries have embraced the outsourced services model with notable success, accelerating and/or streamlining the efficiency of new business endeavors.

Community banks themselves are not strangers to outsourcing key elements of their business services and operations ranging from trust administration and operations, to online bill payment, check processing and imaging, to telecommunications expense management.  Outsourcing has served community banking well, allowing them to compete more effectively against big banks, and democratizing sophisticated business lending and advisory services to firms focused on serving their local economies.

Today, community banks can outsource a warehouse lending service platform that includes collateral management, line reconciliation and technology infrastructure, providing local institutions with the same operational support as any warehouse line lender. Choosing a well equipped, dynamic outsourced warehouse lending platform and service provider delivers a variable-cost service to micro warehouse lending with specific focus on the needs of local banks.

In the bigger picture, the government could further increase liquidity by allowing TARP funds (Troubled Asset Relief Program) to create a warehouse line of credit, backed by federal funds. This is a simple way to increase liquidity—Fannie Mae and Freddie Mac are being bombarded by customers trying to become direct sellers.  These sellers know that selling directly to FNMA/FHLMC will cut down purchase time lines and allow them to stretch their funds further by turning the lines they have faster and more often. The use of TARP funds to bolster warehouse lending would be a great solution if lenders could get access.  Additionally, the funds would earn interest and replenish itself every 15-30 days.

Final Segment Tomorrow…

(Continued from a previous post here)

The warehouse lending predicament threatens a shorter-term robust economic recovery and weakens a vital marketplace. It is in the best interest of our industry and informed policy makers to pursue relief for independent mortgage bankers that have been parched for liquidity.

The recent demise of Colonial Bank further exacerbates the situation at  hand.  The removal of Colonial Bank represents another significant blow to warehouse line lending and independent mortgage bankers.  With an estimated $4 billion in warehouse lending commitments, Colonial represented approximately 20-25% of total current warehouse lending capacity remaining in the market.  Additionally, Colonial serviced some of the largest remaining “large cap” lines left in the industry.  With this fall, the pool of available funds has once again become significantly smaller.  The large independent mortgage bankers currently serviced by Colonial will begin competing for funds that are normally available to middle market lenders and will serve to push more small and mid size lenders out of business further constraining the market’s ability to  meet volume demands and consumer’s needs.

The solution, many agree, lies in problem solving in a different way by looking to the local community.  It has become commonly acknowledged wisdom that the mortgage marketplace is a local, not a national, phenomenon; thus common sense applies that mortgage lending liquidity is best resourced locally. Most IMBs are fully entrenched in their local financial services community, which provides them access to sources of funding capacity that just a few quarters past would have not been feasible, including private equity and smaller community banks.

To be continued…

As the wind blows to and fro in Washington, the warehouse lending sector is still agonizingly short funds.  This is just another example in a long line of examples of why we can’t wait for the government to fix our ills.  We, as an industry, need to take up our own issues and fix them.  If we haven’t learned anything in the last 2 years, we have definitely learned that if we do not self regulate and step up; others who know nothing about our business will…. and here we are today.  

Problems Pile Up in the Warehouse Lending Market

American Banker (09/04/09) P. 11; Muolo, Paul

The Mortgage Bankers Association and other industry groups may have to pitch their plans for aiding the warehouse lending sector to a new regulator and new people in government because the president of Ginnie Mae and director of FHFA — both big advocates for the issue — are leaving their agencies. The industry believes that having Fannie Mae and Freddie Mac purchase participations in warehouse lines would be the easiest way to boost liquidity to nonbank lenders; but the idea also would have to be approved by the Treasury Department, which is losing Assistant Secretary Seth Wheeler, who has been meeting with lobbyists. (More)

(Continued from a previous post here)

Unfortunately, while the financial markets seem to be calming, the economy as a whole is not as steady.  As seen in the chart, the subprime resets peaked in Q1 09 declining to relative insignificance by Q4 09.  The impact of these resets is yet to be seen in the current market as homeowners with fewer options seek refinancing in a market unfriendly to more complex borrowers.  Looking at the chart, the most important thing to note is that the number of resets continues to rise as Option ARMs and Alt-A resets triple and quadruple over the next three years.  The impact of payment shock on homeowners used to paying at either a teaser rate or interest only will compound demand for refinance or force further foreclosure.   Inside Mortgage Finance, a trade publication, estimates there are almost 3 million households represented by this data.

This is germane to the argument about warehouse lending because of the significance of its scarcity in the market.   Since it cannot absorb $32 billion in shortfall, the market will force hard choices based not only on credit or capacity to repay – but more likely on the profitability of the transaction.

In origination, that will mean focusing resources on the loans that are easiest to process and quickest to produce with the lowest risk.  For self-employed borrowers, investors, retirees and emerging markets, that is not going to be great news.  Specifically, the self-employed and investors, aka small business owners/engine of the economy, made wide use of the relaxed documentation requirements of Alt-A and the cash flow benefits of Option ARMs.    Already struggling in a recessed economy, many conscientious small business owners will receive their inability to refinance their personal mortgage loan as a body blow to their business enterprise.

Next segment Tuesday…

(Continued from a previous post here)

Resourceful and creative independent mortgage bankers have already discovered the option of establishing a warehouse line through private equity. GMI Home Loans (gmihomeloans.com), 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 reached out to NVC Premier Fund LLC, an entity managed by New Vision Capital Partners, LLC, for its funds, and worked with Titan Lenders Corp to develop a warehouse line process management platform.

“As a matter of necessity, we went outside the box to secure reliable liquidity for our business, and found a private equity source to fund our warehouse line,” said GMI Home Loans founder and President Glen Lemeshev. “Making it work for our correspondent investors required that we secure a third-party administrator and custodian, and put into place processes and safeguards that ensure our loans are accepted for purchase by them.”

Private equity funds can fill the gap between loan origination and ultimate investor with minimum start up and operating costs by outsourcing the technology infrastructure and process management. They can pilot programs on a smaller scale, taking their capital to market in a highly structured, process-driven environment. When these processes are refined and perfected, funds can scale up, down, regionally, nationally, conforming or niche.

Due to its use of the Titan Lenders Corp warehouse lending management platform, all costs are variable with the exception of the wire transfer fee, which is fronted by NVC when wires are sent to settlement agent for funding.  Nonetheless, all fees are covered by or recovered from the lender when the investor purchases the loan.  Upon receipt of purchase advice, NVC withholds per diem interest (cost of funds) and administrative fee to cover services and out of pocket costs (wire fee) prior to turning over remaining funds to lender.  This deal truly costs NVC next to nothing to execute and run.

Part five tomorrow…

(Continued from a previous post here) 

Interest rate driven growth in first-time residential purchases and refinance activity swelled mortgage demand in the first two quarters of 2009.  Although public policy of low rates and tax credits has had the intended demand jumpstarting effect, for the small business arm of mortgage banking, there is evidence that a portion of that demand is being curtailed at origination as a byproduct of severely limited liquidity.

Downstream of these events, the survival of independent, community-based mortgage businesses is threatened.  A contracted marketplace of independent mortgage bankers is creating a less cost competitive environment for purchase borrowers of every ilk, dangerously limiting refinance opportunities for troubled homeowner households and driving property values lower as asking prices adjust to lure buyers with reduced buying power.

Part four tomorrow…