Door Opens for CU Warehouse Lending
Today, big players are shuttering their operations as a result of fraud, repurchase demand, exposure to toxic loans and market flight. According to industry data, warehouse lending capacity has crumbled from $200 billion in 2007 to just $20 billion in the first few months of 2009. The Mortgage Bankers Association said since 2005, the number of financial institutions offering warehouse lines of credit to independent mortgage bankers declined from nearly 115 at its peak to now less than 30. JPMorgan Chase shut down its warehouse lending division after it acquired Washington Mutual, and most recently, Guaranty Bank and National City have also moved to close their respective operations.
Still, some believe the unique lines of credit have opened a door for credit unions, community banks and other lenders to fill a void. Among them, Titan Lenders Corp., a Denver-based (www.titanlenderscorp.com) provider of mortgage back-office fulfillment services, touts warehouse lending as one way to garner liquidity through the temporary funding of mortgages.
"Most of the players got caught in the subprime debacle," said Mary Kladde, president and founder of Titan Lenders. "What happened with New Century and others was they got stuck holding loans that no one would purchase."
Warehouse lines of credit are real estate secured short-term lines of credit that allow mortgage bankers to fund loans into the secondary market until the loans are purchased by the end institutional investors. The funding source, which is the credit union or bank, generally offers the necessary funds through a revolving purchase agreement to a mortgage banking company for funding mortgages at closing. Kladde said all of the loans are presold in the secondary market to large institutional investors. The warehouse line funding covers approximately a 15 to 30 day period between loan closing and the sale of the loans to the end institutional investor.
The way financial institutions earn revenue is through interest that is paid on each transaction on the number of days the warehouse lender holds the mortgage loan, from the original funding date to the date the funds are received from the mortgage purchaser.
The rate charged is prime or Libor plus a negotiated margin as well as a per transaction fee from a company like Titan to cover administrative and other related expenses, including the wire fee, overnight deliveries and the custodial fee.
Kladde said another reason warehouse lending fell off at banks was because of a glut of loans being sold at discounted rates. With margins of 3% to 3.5%, it took a majority of lenders out of the market. About 80% are no longer around.
"Whoever funds the money, owns the note until the lender sells the loan," Kladde said. "When that occurred, a lot of notes were not purchased."
By far, the main reason for the collapse of major warehouse lenders over the past two years were the toxic loans with their contingent repurchase demands from low performance, early payment default and fraud, Kladde said. Most of their major lending partners were entirely built on these loans and when the collapse began they went out of business, leaving the warehouse lenders with little or no recourse for recovery, she explained. Today, the mortgage market is characterized by very limited product offerings of the most traditional and conservative varieties, she noted, adding most loans are either agency or government supported, and even these have seen dramatically enhanced underwriting standards.
"For the warehouse lender, the lack of competition has created a market climate that is risk averse, which definitely works in credit unions' favor," Kladde said.
Warehouse lines of credit may be among the safest entries because of the 15 to 30 day turnaround, Kladde said. She touts backing from the Federal Housing Administration and Ginnie Mae and "tightened" underwriting guidelines as selling points. With banks getting TARP funds, there is discussion that Ginnie Mae may even insure the credit lines "and that may also be good for credit unions."
Meanwhile, credit unions may be leery of venturing out because of takeout risks. Kladde said warehouse lenders, once permissive of aging loans, can no longer afford the risk of loans not purchased in a timely manner. Takeout risk can be managed in this market through due diligence with regards to compliance, fraud and quality loan production, she explained.
"Titan often requires its correspondent partners to employ its closing and post-closing services to mitigate takeout loss, ensure swift salability and leverage Titan's reps and warrants," Kladde said. "Should lenders refuse to purchase or fail to honor a commitment to purchase, Titan has a broad base of experience in quickly repackaging loans for sale within the current market or as 'scratch and dent.'"
Outright fraud was a major culprit that led to banks closing down their warehouse lines of credit. Kladde acknowledged that while "there is no way to entirely insulate against fraud," several requirements, including obtaining the financials of the originating lender, may help to mitigate losses associated with fraud. Borrower fraud, what she described as the "most insidious form," can be mitigated through checks with national vendors. Titan requires that all loans funded under its reps and warrants have proof of some recognized fraud check, she said.
Settlement fraud can be checked with a requirement that the closing protection letter, errors and omissions and master CPL are confirmed and verified with a major title underwriter, Kladde advised. Titan requires background checks on agent attorney and maintenance of approved settlement agent lists, she said. In escrow states, verification of funding to the title agent, not the escrow agent, is required.
"Additional due diligence is performed to ensure that there are no illegal affiliations or pre-existing relationships between the agent performing disbursement and the originator or borrower," Kladde said.
So far, Titan's clients are mostly community banks. However, Kladde said warehouse lending is ripe for picking within the credit union industry since they have more reach in smaller and rural communities where banks are not located.
"The big guys have really messed things up and now consumers and taxpayers are taking the hits. We know that credit unions and community banks weren't out there investing in high-risk loans," Kladde said. "They have money and depositors, but they don't really have any investors. They do have funds that they can invest for the short term."