REQUIRED READING: While no corner of the financial services industry was immune to the recent economic downturn, few areas were as harshly impacted as the warehouse lending sector. In 2005, there were more than 115 active warehouse lenders. By 2010, there were fewer than 30, and the sector's total aggregate capacity of $25 billion represented a nearly 90% drop from the pre-recession period.
Today, things have changed. The proverbial dust has settled, but it has also been swept away in favor of a new stability. Granted, the sector is nowhere near its pre-crisis parameters. However, a new normalcy is taking root – whether this change is for the better, however, remains to be seen.
‘Since last year, the warehouse lending crisis has dramatically subsided,’ says Scott Stern, CEO of Lenders One, based in St. Louis, and chairman of the Community Mortgage Lenders of America. ‘There is warehouse lending capacity available for clients looking for it. At this point, capacity is no longer the issue.’
The warehouse lending sector is still feeling the pain of the absence of several of its longtime leaders, most notably through the closure of PNC Financial Services' National City warehouse operations and the severe downsizing of Southwest Securities' operations. However, the surviving warehouse lenders are finding a healthier selection of mortgages.
‘The paper being originated today is clean, and there are no exotic products being offered,’ says Rich Guber, chief financial officer for Embrace Home Loans, based in Newport, R.I. ‘With capital markets calming down and business being brisk, those that stayed in the market and the new entrants coming in see an opportunity to make money.’
Among the new players is Dallas-based NexBank. ‘We got into the space in January and were funding our first lines in June,’ says Jed Meaux, vice president of wholesale lending. ‘We're somewhat opportunistic – we saw a void in the space. Plus, the mortgage market in general is pretty vanilla, so it was a safe time to get in.’
NexBank got into warehouse lending at the right time, Meaux adds, because more competitors were looking to make their entry into the sector. David Frase, an independent banking consultant and former executive vice president in charge of warehouse lending at Southwest Securities, concurs that current warehouse lenders will see more rivals in the near future.
‘We're having a number of investors resolving to move into the space,’ he says. ‘There has been a lot of movement in the last couple of months.’
According to Guber, new warehouse lending entities will include MetLife and Goldman Sachs. ‘They seem to be spending a lot of time and money on having the right staff and software in place,’ he says.
To the rescue
During the peak of the warehouse lending crisis, some industry leaders wondered aloud if community banks were able to step in and fill the void. They did, to a certain extent.
‘Some small community banks – and you don't often hear of them – do this [type of service] as a favor for a client or two,’ says Barry Epstein, senior vice president of warehouse lending at Triumph Savings Bank in Dallas. ‘But community banks are not able to fill the gap. They have $200 million to $400 million in assets, and they do not have the balance sheet to expand out. They can take care of what's necessary in their footprint, but I don't know of a small community bank vertically integrated in the U.S.’
Yet NexBank, with $597 million in assets, has found a way to widen its warehouse lending footprint. ‘We only lend in Texas,’ says Meaux. ‘But our clients can use these lines on loans anywhere in the country.’
One entity that has been conspicuously absent from warehouse lending throughout its troubled period is the federal government. During the peak of the sector's troubles, some talk was floated about seeking Washington's help.
Lender One's Stern met with several officials in Washington during this period, but he quickly realized that federal help was not going to happen.
‘It is fair to say they weren't aware of warehouse lending,’ he recalls. ‘I think warehouse is not an obvious business – it's a complicated business with operations behind the scenes in the mortgage industry. Asking lawmakers and regulators to understand a part of the industry that even mortgage bankers don't understand is a complicated issue.’
Ultimately, however, federal intervention was not needed – and few people in the industry rue the lack of Washington-based assistance.
‘It was a great thing,’ says Frase. ‘We didn't need Washington in that space. They don't come in and just assist and leave – they come in with regulations and stay.’
Ruth Lee, vice president of sales for Denver-based Titan Lenders Corp., concurs, noting that the sector's ability to heal itself without federal input was a successful example of industry-wide self-sufficiency.
‘So many people fell out of the market that the attrition that occurred in the last three years helped,’ Lee says. ‘And a lot of community banks came in with 'buddy' lines – banks going out and getting lines from more local resources. All of that together created more flexibility in the space. It was pure capitalism: If you don't have money, you don't play.’
But that's not to say that the federal government has completely ignored the sector. On Nov. 16, 2010, the Department of Housing and Urban Development (HUD) published a notice in the Federal Register stating that it was considering issuing guidance under the Real Estate Settlement Procedures Act to ‘address possible changes in warehouse lending and other financing mechanisms used to fund federally related mortgage loans that have occurred since HUD issued regulations specifically related to this area in 1992 and 1994.’
Gibran Nichols, CEO of the CMPS Institute, based in Ann Arbor, Mich., observes that other aspects of federal input will impact warehouse lending.
‘Today, a lot of lenders and wholesalers are concerned with the Fed's new compensation rule,’ he explains. ‘From a compliance standpoint, the biggest change in the compensation structure will impact how mortgage banks structure warehouse lines – some transactions are subject to the new compensation rule, and that has the potential to create a lot of confusion and impact affiliate business arrangements and warehouse lines.’
Going forward
But even without federal input, the warehouse sector still has internal challenges to address. For starters, the terms on warehouse lines are much tighter today, Stern notes.
‘You pay more for a line, and you are turning it less,’ he says. ‘The cost of origination is up, and the number of loans you can originate is down.’
Quality control is also a factor, Stern continues. ‘Warehouse lenders are not only looking at the originator; they also look at the buyer,’ he says. ‘It doesn't do you any good if you have new buyers but no warehouse lender wants to work with them.’
Stern further adds that new warehouse lender obligations are creating an additional onus on mortgage bankers. ‘In exchange for warehouse lines, you have to commit a certain amount of volume to the correspondent channel or offset the number of fees to warehouse lenders,’ he says. ‘These were obligations that historically did not occupy warehouse lending – but now they do.’
Steve Jacobson, CEO of Fairway Independent Mortgage Corp., based in Sun Prairie, Wis., warns that repurchase risk will be a major issue impacting the sector in this year.
‘Warehouse lenders have to make sure that they have reserves available,’ he says. ‘No one knows where the expense exposure is going to end.’
For those seeking warehouse lines, Jacobson urges mortgage banks to ensure they remain financially solid.
‘You have to have a certain net worth to be in the game,’ he says. ‘If someone says you're good today, you want to make sure that you will be OK 12 months from now.’
‘Warehouse lenders are going to be very, very tough on due diligence with existing and new books of business,’ Guber adds, noting that while warehouse lines are available, some lenders – including Embrace Home Loans – have distinctively finite resources. ‘We have three facilities that serve our needs well. We could have more if we wanted to, but that would be an operational nightmare. Three is challenging; four is difficult.’
Titan Lenders' Lee also warns that it would not be totally surprising if some more shake-ups were to occur in the sector.
‘Warehouse lending became less attractive for banks as interest rates started to rise,’ she says. ‘I question what a lot of these Johnny-Come-Latelies will do in a number of years. Maybe they'll be remarkably robust, though some people who struck while the iron was hot will be out in a year or two. This market is not about low-hanging fruit – they fall off the tree or get eaten up.’
