ing the decade's boom years, Wall Street loved Main Street, and big banks loved smaller institutions. [/b]This love fest resulted in bountiful credit lines for mortgage bankers. But as the greed for profits grew inside the mortgage Wall Street giants, credit quality, analytics and caution became superfluous. As the big banks got even bigger throughout the real estate boom, they became difficult to regulate. We know what happened next. Many of the same Wall Street players and banks that exited the industry were also heavily vested in warehouse lending. Their departure has been disastrous. The Warehouse Lending project, an industry group formed to address this crisis, states that ‘since 2005, the number of financial institutions offering warehouse lines has declined from a peak of around 115 to less than 30 today, and total aggregate capacity has declined by 90 percent.’ It's been difficult, if not impossible, for liquidity and lending to even partially resume in warehouse lending, because confidence has not yet been restored. Banks are prioritizing their resources to address distressed assets, foreclosures and modifications. The lack of credit for mortgage lenders is making it difficult for some lenders to compete, increasing the cost of mortgages to borrowers, diminishing secondary market execution options and undermining the integrity of government-related programs. Secondary marketing managers across the country are struggling with this issue. They are pulling their hair out trying to manage turn times, delivery options, pricing strategies, etc. According to Scott Stern, CEO of Lenders One, a national alliance of independent mortgage lenders, some of Lenders One's members have been forced to ‘take a refinance holiday because of a lack of warehouse lending capacity.’ Countless mortgage companies across the country do not have capacity and, therefore. have to diminish demand by raising rates. This leads to tougher credit standards or selling into less desirable secondary execution strategies, because specific correspondent investors' purchase turn times are superior. The warehouse crisis is particularly rough on the independent lender. According to recent Home Mortgage Disclosure Act statistics, small to midsize independent lenders are responsible for an estimated 40% of mortgage lending in the U.S. The owners of many of these companies put their own net worth at risk to support their company's funding ability. They rely heavily on the capacity and capabilities of their warehouse lender. What many people outside of the industry don't understand is this: A warehouse lender is more than just a simple credit line. It is the lifeline of a mortgage company, because without it, the company ceases to exist. As in almost every important relationship, when things go well, it seems like a dream; when things go wrong, you quickly realize you are living in hell. Mortgage lenders are experiencing problems analogous to those that their borrowers have endured. Lenders with warehouse concerns are facing the consequences of the credit crunch. The qualifications for a warehouse line have become much more stringent. The application process for a warehouse line has become more comprehensive – the due diligence a company must endure to receive a warehouse line in today's environment can feel like you are arguing your case before the Supreme Court. [b][i]Fixing a hole[/i][/b] Some solutions are being put forward. These suggestions include federal guarantees of warehouse loans to persuade new and existing warehouse lenders that these credit lines are a safe and sound investment. Another option being considered is granting temporary authority to the government-sponsored enterprises (GSEs) to provide direct liquidity for warehouse lending or similarly imposing guarantees on agency eligible products. Even more opportunities exist in restructuring the risk-based capital (RBC) rules to minimize the capital ratio required for warehouse lending. If the RBC rules were modified, more capital should be able to be attributed to warehouse credit lines, thus clearing up some of the credit congestion. But the best solutions could arise from an amalgamation of private and public solutions. In times of crisis, private individuals and corporations can enact real change. Since legislative measures can sometimes take extraordinary amounts of time to enact, private-sector initiatives should be called into play. There is even support for that from an influential Washington figure: Joseph Murin, president of Ginnie Mae, recently stated that he could not envision his agency becoming a warehouse lender due to charter limitations but that Ginnie Mae ‘could certainly help administer one.’ But until a solution comes about, what should a mortgage lender do to secure warehouse lines? First and foremost, it is important to review the financial viability and likelihood that your existing warehouse lender will remain in business. Even if you are completely confident that your company will not go under, draft your emergency recovery plan so that you will be prepared in the event your confidence is shown to be misplaced. This plan should address other warehouse lenders that your company could use, the economic impact from non-usage fees of adding a line that may not be utilized, the financial and competitive impact of adding a warehouse line that mandates a certain percentage of your loan sales, and a shock analysis of the impact to your firm from losing a portion of your line or having to utilize an interim more expensive line. Complete an analysis of specific warehouse strengths, weaknesses, opportunities and threats, because in the current environment, it is hard to have any leverage in negotiating a new warehouse line without intense preparation. Some of the larger lenders that have both correspondent and warehouse channels have instituted a ‘quid pro quo’ for use of their funds, and require that a certain percentage of volume be sold to them under the terms of their warehouse agreement. Some of these larger lenders have the benefit of offering early purchase facilities with off-balance-sheet treatment. Review all of your relationships, and identify those you feel are long-term partners and that complement your corporate mission. Review the efficiency of your operations. Turnaround time is not just critical to your institutional reputation; it may be critical to your survival. Spend the extra time it takes to ensure that best execution includes delivery time to your investor. Set standards to incentivize your staff for closing loans earlier, and avoid the end-of-the-month capacity crunch from becoming a reality. It is easy to understand the value of the positive return your firm may be realizing on interest float income, but be cautious to weigh your desire for profits on interest against the desire for purchase of your loan. Go the extra mile and outline all of the ways you operationally protect your warehouse lender's interest. If you are selling to a third-party lender and are not receiving the level of service you need, the time may be right to consider selling directly to the agencies and taking advantage of some of the early funding opportunities. Unfortunately, there are some warehouse lenders that are taking advantage of the lack of supply, and imposing higher rates and fees to lenders for the privilege of their line. Given some of the alternatives, these lines may need to be considered for short-term survival. Now is the time to collaborate, cooperate and communicate. If you are not actively involved in an industry group that you can discuss and get feedback from, I recommend joining one immediately. Individually, small, medium and large mortgage firms are all interconnected and can each do their part to help bring back confidence in lending. If we continually act together, we will achieve epic improvements that will have long-term systemic benefits. For those of you on the sideline, now is time get in the game. There is some good news: There are still numerous community banks and several large warehouse lenders who are doing all the right things. These businesses are lending responsibly and making respectable and legitimate profits. They believe in the viability of the mortgage lender, and they understand the importance of supporting the small to midsize companies. [i]Michael L. Larssen is president of Larssen Consulting Group, Clearwater, Fla. He can be reached at mlarssen@larssenconsulting.c
