By Brad Finkelstein
If the changes in the warehouse
lending business could be summed
up in a phrase it would be this:
"What a difference a year makes."
Today, several new bank players are
either entering the warehouse space
or contemplating such a move,
according to David Lykken of
Mortgage Banking Solutions, Austin,
Texas. His firm has assisted three
banks start their own programs.
"They are not the biggest warehouse
lenders in the world, but we are
helping them get the business up and
One such client is Northpointe Bank,
Grand Rapids, Mich. Lykken helped
the depository establish its program,
and assisted in picking the executive
managing the effort.
Community banks of various sizes or
the "banks that bank other bankers,"
Lykken said, are the ones entering
the sector. "The good news is there
is capital flowing back into
warehousing," he said, describing his
feelings about the business as
Bob Rubin, principal of the Business
Loan Connection, Southfield, Mich.,
knows of at least three new players.
"However, there are strings
attached," he said. Like Lykken, he is
seeing community and regional
banks stepping in, but these lenders
are charging what might be
considered steep prices (historically
speaking) for credit.
Many of these new players also are
re-underwriting each loan file and in
some cases rejecting mortgages that
already have an end investor in the
secondary market. Although
standards can be strict for new
entrants, these banks fear getting
caught with bad loans that were
funded with their lines.
Nonbank lenders in need of credit, or
even loan brokers trying to partner
with nonbanks, "are wandering
around in the dark," Rubin said.
Some bank lenders are offering lines
with terms that may seen wonderful
on the surface, he said, but are, in
fact, "frighteningly bad."
Interestingly, several large
commercial banks (that aren't
already in warehouse) are showing
little inclination of getting in. Most of
the activity, according to advisors
who play in the space, is coming
from community and regional banks.
And the megabanks that are looking
to expand, said Lykken, are being
Current players are still being careful
on granting warehouse credit with
interest rates on lines (and fees) at
historically high levels. And not
surprisingly, there can be tight
restrictions on what type of loans can
placed on the lines. In particular,
some lenders, including JPMorgan
Chase, will not provide warehouse
credit on broker-sourced loans.
Also, some warehouse providers are
only banking lenders that are selling
whole loans in the secondary market,
with flow delivery on a "best efforts"
basis. Lykken said this is because the
warehouse lenders are saying they
don't understand hedging and are
leery of it.
"Because there is such a need, a
demand, for warehousing, they are
able to pretty much dictate the game
as it relates to fees and interest
rates," he said. "The days of a
positive spread, unless you have got
a very large net worth, are gone."
There could be some positive
arbitrage using the line but in most
cases the net interest margin is
neutral or negative.
The formula on haircuts has not
changed as far as he has seen. Banks
also are telling clients if they want a
line the nonbank must keep a certain
amount of cash in deposit with the
bank. Rubin says some banks are
solely interested in creating a deposit
relationship with these nonbank
For borrowers seeking lines lenders
are being tougher, demanding
personal guarantees and being less
flexible about net worth
requirements. But most owners with
substantial net worth are getting
lines. Still, the time it takes to secure
a line can take months longer than
expected. Rubin has one customer
who has been looking for a line, "a
wonderful company" that in August
will be under consideration by a
provider for one full year. The
company will get what it needs, but
only after going through a high level
On the other hand, another client got
a $200 million line after just three
weeks. But this company is highly
capitalized and well managed.
"What's happening is going to
separate the boys from the men," he
Rubin adds that if he were giving
advice to those seeking a line, it
would be "load yourself up with
capital. If you have experience and
you know what you are doing,
coming into the marketplace with $1
million isn't going to do it. Do
something to make yourself stronger
than you are now."
Warehouse lenders, meanwhile, are
being more aware of stale loans
remaining on the line. Mortgage
Banking Solutions is advising clients
to stay on top of stale loans, because
it can be an early warning sign that
there might be a problem going on at
the mortgage banker.
In today's market most loans funded
by warehouse lines are vanilla:
Fannie, Freddie and FHA approved,
which means if there is a stale loan
fraud or another issue could be
involved. When a loan remains on
the line, the warehouse lender
notices and tries to work with the
primary funder. Problems occur when
the mortgage banker ignores the
problem and does not communicate
with the warehouse provider, said
Rubin notes that warehouse
providers do not want any surprises,
especially if the company they lent to
happens to be fighting buyback
requests from the agencies.
Right now, "it is a land of perfect.
Everyone wants Mr. or Mrs. Perfect
Customer. My $200 million client was
such a customer. They were perfect,
they never had a buyback. Years
ago, I was told, you only want to do
business with people who don't need
you and that's what everyon is
looking for," he said.
For those who are making warehouse
loans today, it is the "best of times,"
said Lykken. "These are record-
earning years for warehouse banks.
This is a very profitable business. It
is so darn profitable right now, it is
crazy not to be doing the business