Warehouse Isn't Just for Big Players
Mortgage warehouse lending has been considered a niche to be occupied by the larger banks and some of their midsized cousins. However, one small institution has been successful in the space for over two decades.
Fidelity Bank is a one-branch state-chartered bank in Edina, Minn., which was founded in 1970. Current CEO Charles Mueller said much of the bank’s culture comes from his predecessor (and the current chairman) James Morton, whose background was as a working capital lender for Norwest.
It was being a working capital lender that led Fidelity into the mortgage warehouse business in the late 1980s. Mueller said the bank views providing warehouse facilities as much the same business as making working capital loans or any other type of accounts receivable financing.
There was a mortgage company in the same office park (located in the southwest part of the Minneapolis metro area) which approached Fidelity for warehouse credit.
At first, the business was a “one-off” for Fidelity, but it started expanding this line in the run-up to the real estate boom in the late 1990s. He said the bank started to approach Minneapolis-based mortgage bankers for the business and it picked up “a fair number of accounts.”
From the late 1990s through 2003, the warehouse business (in conjunction with its commercial business) provided Fidelity with a nice return on equity, Mueller noted. A few problems started to develop in the warehouse space in 2006 and 2007; it did not provide credit for subprime loans, but there were customers who had alt-A loans on their lines.
Some of those lenders became illiquid and Fidelity ended up with the portfolio and had to liquidate them itself. “Fortunately it was prior to 2008,” he said, and therefore the company reviewed its whole program, including documentation and process.
As a result, Fidelity was clean, had a good relationship with state banking regulators and well-prepped with good capital and thus able to take advantage of the warehouse lender shakeout in 2008, Mueller said. As a result it began moving out of the Minneapolis area and getting accounts from other markets.
Its current target is to serve mortgage lenders which are headquartered in the central part of the country, as far west as Utah, as far east as the Chicago/Milwaukee area and as far south as Kansas City. But those firms have offices all around the country, he added. Currently it lends to 18 originators.
It will do broker-to-banker conversions. Net worth typically starts at $500,000 and goes up to $5 million.
Fidelity offers a traditional warehouse product as well as a purchase facility. “It is a good market niche for us that fits very well with our commercial working capital space,” he reiterated.
That expertise makes it “good asset based lenders, we know how to look at and underwrite assets.”
Mueller added that technology is the great equalizer these days and what has allowed it to compete against major players. Information about the note today can be delivered electronically, allowing Fidelity to evaluate the quality of and the number of buyers for the note.
Being small allows it to be nimble, Mueller pointed out. It allows Fidelity to move quickly when pipelines get clogged. “We’re able to say, 'We see the product you originated, we like the product, we’ll consider purchasing more.’”
Loans bought off the purchase facility are done without recourse. If there was recourse, it could not do the level of lending that is does, he said.
Fidelity has $408 million in assets on its books, of which $173 million is related to warehouse and purchase, plus $150 million of commercial and commercial real estate loans.
Mueller considers this a nice balance because the two sides are countercyclical and act as a hedge. So the bank’s resources can be moved fairly easily as needed and it can maximize the use of its capital.
While most of what it provides credit for is conforming, it will also provide funding for jumbos.
Another fact that might be appealing for clients and potential clients is that Fidelity does not originate mortgages on its own, so it does not compete with its clients, Mueller said.