REQUIRED READING: The Crisis In Warehouse Lending

are a serious movie lover, you will recall ‘Network,’ a dark comedy from 1976 about the television news business. In the film, the character of Howard Beale, dubbed the ‘Mad Prophet of the Airwaves,’ was played by Peter Finch in his Oscar-winning performance, and his landmark moment came when he urged television viewers to rush to their windows, stick their heads out and scream, ‘I'm mad as hell, and I'm not going to take this anymore!’ If that character weres a real person in today's world, he would urge the nation's mortgage bankers to do the very same thing – this time, to complain about the lack of warehouse funds available for the industry. Warehouse funds have all but dried up. Once plentiful, the funds the mortgage banking industry needs to remain in business seem to have gone the way of the Oldsmobile, gas wars and the good five-cent cigar. Warehouse funds are like oxygen to our business, and its absence means many companies will not survive much longer before asphyxiation becomes inevitable. What makes it all so frustrating is that there are millions of people out there who want and need loans, but mortgage bankers are unable to serve most of them. It's all a bit convenient, according to the pundits. The federal government invests billions of dollars in bailout funds and wonders why the beneficiaries of their largesse aren't getting the money where it is needed to keep the economy afloat. Reserves are being shored up, high-profile lending is getting some attention and some other areas are seeing some of the effects. But what about the business-to-business priorities? Shouldn't some of these taxpayer dollars be helping businesses that employ and finance the homes of those taxpayers? It's not like a warehouse line is a handout, after all. But it is a vehicle that spells survival or demise for a mortgage bank, and mortgage banks are the prime competitors for the depository institutions in real estate finance. Industry observers are wondering whether this is all a play by the banks to eliminate a prime source of competition, and at the same time, get rid of a lot of mortgage brokers who have been controlling the point of sale for the last 15 or 20 years. With many banks fleeing the wholesale origination sector, mortgage brokers are feeling under siege, and not without justification. They are well accustomed to taking a beating from other sectors of the industry – especially Wall Street – that are seeking to blame them for the current crisis. Even mortgage insurers are getting into the act, with at least one of the major companies refusing to accept third-party originations any longer because, well, they're mad as hell and they're not going to take it anymore. Just as there aren't any credible statistics to show that broker-originated loans are riskier, there aren't very many wholesale lenders out there anymore, either, with the sector drying up like an Arizona sidewalk in July. Mortgage banks have long been a staple in the wholesale lending arena, and with warehousing all but gone, the brokers are left with finicky banks asking for all manner of strange conditions, even for the most plain vanilla of loans. The net effect is that refinances are not happening with anything resembling efficient rapidity, despite the lowest rates for conforming conventionals and the best climate for Federal Housing Administration (FHA) loans in almost a generation. [i][b]Fighting back[/b][/i] The mortgage banking industry isn't taking it sitting down. Technically, it is sitting down, but it is sitting before committees in the halls of Congress and in the Oval Office. The Mortgage Bankers Association (MBA) is taking its case to TARP central, and it expects to be heard. If the economy is to be restarted, the home lending market needs to be revived if vacant properties are to be owned by someone other than a lender and values are to stabilize. In essence, the recovery will remain stalled if mortgage lending isn't given new life – in another word, oxygen. And that won't happen until warehouse funds begin to flow once more. MBA President John Courson is busy educating the Treasury's Timothy Geithner, and the scuttlebutt is that all the lobbyists on the MBA's rolodex are targeting the Federal Reserve and the Federal Housing Finance Agency (FHFA). Not necessarily to influence them, per se, but just to educate them on what a warehouse line is – and once they understand, it is presumed they will appreciate the threat to the industry. Another interesting industry group to follow is the Warehouse Lending Project, a consortium of non-depository mortgage banks that are addressing the shortage by educating government officials and lawmakers. Headed by longtime industry veteran Glen Corso, who is also a former mortgage insurance senior executive, the group seems to be promoting as much creativity and pro-activity as possible to avert an even greater crisis. Industry journalists are having a great deal of fun trying to predict what the future may hold. Some are saying we are just around the corner from having Fannie Mae, Freddie Mac or both offering warehouse lines, putting the frosting on the socialized financial system ‘cake.’ Others are thinking it might be the government-sponsored enterprises buying loan participations in warehouse lines, harking back to the founding days of the secondary market, when participations between savings and loans were the state of the art in secondary marketing. Something has to give, or the mortgage banking industry will face extinction, leaving a handful of huge money center banks to handle the entire financial spectrum for all Americans. And with a non-trivial amount of their ownership vested in the federal government, it begins to look and feel more than a bit Orwellian. As John Courson said in his statement before the House Financial Services Committee last February, ‘Warehouse lending capacity has declined dramatically – from over $200 billion in 2007 to approximately $20 billion to $25 billion in 2008. For the originator that depends solely on warehouse lines of credit, this reduction could reduce liquidity, extinguish their lending business, and adversely impact the consumers in their market, stifling the real estate recovery before it has a chance to get off the ground.’ That's the real issue, regardless of what it does to the mortgage banking community. It threatens the recovery the nation so desperately needs. Some in the industry are picking up the Howard Beale mantle, seeking different ways to provide warehouse lines to retail mortgage banks. They are not doing so with any particular fanfare and their offerings will be initially modest – but it is happening. They will also be conservative on the types of loans allowed in the warehouse, with FHA the obvious choice. Their funding may be coming from nontraditional places, too, which will have effects on their appetites for risk. But in the main, we may see the emergence of new types of commercial finance vehicles to replace the older banking paradigms, and that certainly is not a bad thing. Though new solutions are coming, will they arrive quickly enough to provide the liquidity the industry requires? The voices are growing louder among those in the mortgage banking community, and they are becoming increasingly strident as the industry gets mad as hell, and less inclined to take it anymore. Howard Beale would certainly approve of the commotion, especially as it leads to positive change. [i]Don Schmaltz is a 40-year mortgage industry veteran and CEO of Capital Warehouse Group, a newly formed Maryland-based mortgage warehousing company. He can be reached at dschmaltz@capitalwarehousegroup.c


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