Looking To (And Beyond) Washington For Warehouse Help

by Phil Hall
on April 29, 2009 No Comments
Categories : E-Features

style=’font-size: x-large’>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. {OPENADS=float=right&zone=13} ‘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.’ Carrier acknowledged that the MBA has faced its own challenges in trying to relay the gravity of the situation to federal regulators and members of Congress. ‘It is a difficult issue to grasp, because it is behind the scenes,’ he said. However, the association's attempts to spur Washington's intervention have not been successful. ‘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?'’ ‘So we went to the Treasury and hoped they would make [Troubled Asset Relief Program] (TARP) funds available to warehouse lenders,’ he continued. ‘Treasury said, 'This really isn't a TARP issue; it is a [Term Asset-Backed Securities Loan Facility] (TALF) issue – go to the Federal Reserve.' So we went to the Federal Reserve and asked for TALF funds, and they said, 'No it's not a TALF issue; go to the government-sponsored enterprises (GSEs).' We got a runaround there. We went to Fannie and Freddie, and they were at least open to [talking about] the issue and figuring out if there is a possible solution out there.’ However, warehouse sector lenders expressed doubt that a solution to the problem could be found in Washington. Ken Logan, director of the residential mortgage and consumer group for Wachovia Securities in Alpharetta, Ga., argued that the industry would do better by saving itself rather than relying on help from Washington. ‘As for this notion of Fannie and Freddie, the [Federal Housing Finance Agency] (FHFA), the Treasury or any of those type of government solutions – my advice would be: Don't hold your breath on that being a quick fix,’ said Logan. ‘Most of the originators of the warehouse lines are not Fannie and Freddie customers. Most of them are independent companies that don't sell to Fannie and Freddie. So the rub is effectively asking the government to give a performance guarantee on someone who is not a customer – someone they don't know anything about. You can see from a fundamental standpoint how that is hard to swallow.’ Jerry Davis, senior vice president for warehouse lending at Viewpoint Bank in Plano, Texas, concurs with Logan. ‘I don't think we're going to find a lot of answers from the GSEs or the government programs,’ he said. ‘I don't think that's our direction.’ Davis argued that healthy financial institutions need to begin exploring the possibility of setting up their own warehouse divisions. He noted that Viewpoint Bank created its own warehouse division in June 2008 and has already received more than 250 applications for warehouse lines. ‘I think the industry has evolved to the type of industry where we're working on our own,’ he said. ‘The challenge is upon us to come up with our own ways to put warehouse back in the marketplace and return the industry to where we once were.’ Carrier supported the notion – a point that he raised in a conversation with the FHFA director. ‘One of the remarks we made to Jim Lockhart himself was, we couldn't remember the last time a warehouse lender actually left the market because of what happened in the warehouse business,’ he said. ‘Most of what happened was the result of banks' being hurt elsewhere, with warehouse being a very easy place to wind down.’ [i](Please address all comments regarding this article to Phil Hall at hallp@sme-online.co

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