With so much attention focused on the housing market these days, it is surprising that an extremely critical, yet not well publicized, link in the mortgage-lending chain is in danger of becoming permanently broken.
Warehouse lending, which provides short-term funding to mortgage banks so they can originate mortgages and sell them in the secondary market, is headed toward extinction.
The situation has already reached the point where many of the “once-in-a-generation” refinance and purchase opportunities touted in the media are not attainable by many consumers due to the fact that lenders face a cash crunch caused by the loss of warehouse credit lines.
The loss of warehouse lending is not only devastating to homebuyers, but also to home sellers, lenders, home builders, communities and every other entity involved in the homebuying process. Over the last two years, available warehouse funding has decreased from a capacity of $200 billion to a capacity of $20 billion to $25 billion.
This is significant because lenders that utilize warehouse lines of credit account for more than a quarter of all residential mortgages and, according to some reports, more than 50 percent of Federal Housing Administration loans. Even more troubling is the fact there were 30 warehouse lenders in 2007 and today there are about 10 active lenders.
A mass exodus of warehouse lenders means that, due to lack of available funds, borrowers cannot take full advantage of the now historically low interest rates.
When a nondepository independent lender, the type that relies on a warehouse line of credit, exits the market, there are fewer competitors left for a borrower’s business. This generally increases interest rates and other fees that borrowers are obligated to pay, as well as longer wait times for borrowers to complete their transaction and close their loan.
Additionally, when a bank has limited cash on hand to make loans, it needs to manage the amount of loans it funds and the number of applications it receives. Unfortunately, one of the most effective tactics for limiting loan application volume is to raise rates.
The bottom line is that the pullback of warehouse lines of credit has major consequences to the overall home-financing market, most significantly in limiting how far mortgage rates can drop for borrowers.
Fortunately, policymakers in Washington have the power to revitalize this crucial piece of the mortgage machine and avoid the pending disaster associated with the depletion of warehouse lines of credit and the extinction of independent mortgage banks.
The government can and should take steps to help maintain existing lines of warehouse credit and create new lines of warehouse lending by providing a short-term guarantee of warehouse lines that are collateralized by Fannie Mae, Freddie Mac, FHA and Veterans Administration loans that are held for sale by mortgage lenders.
In addition, bank regulators should re-examine the risk-based capital rules to reduce the amount of capital banks must hold against warehouse lines of credit they extend.
Without a viable solution to the issue of diminishing warehouse lending capacity, the 1,000 or so nondepository mortgage lenders nationwide, many of whom have been serving their communities for decades, may have to shut their doors forever.
The ultimate losers will be consumers and the communities that the independent banks, often locally-owned small businesses, support with jobs, infrastructure and the dream of sustainable, affordable homeownership.
John Courson is president of the Mortgage Bankers Association.