There is a dichotomy that has developed in the warehouse lending marketplace, said one industry consultant. There are more of these lenders around than a few years ago. But they are looking to make credit available only for loans that fit their overlays.
There aren’t as many companies that will do things outside the box or issue more risky credits such as scratch-and-dent lines as the mortgage lending industry would like to see, said Bob Rubin, principal of The Business Loan Connection LLC in Southfield, Mich., a financial services firm specializing in connecting qualified business borrowers with banks and private equity groups. “The real nitty-gritty, the kinds of lines that are needed are hard to come by.”
But as larger warehouse lenders and correspondent aggregators have those businesses, smaller firms are stepping in to attempt to fill the void. “When people go out, others see the opportunity,” said Rubin.
And it is not only the loss of captive lines provided by the correspondent purchasers that is having an impact on the warehouse lending business.
With fewer correspondent purchasers, turn times in this channel have been increasing. This is creating stress on warehouse facilities as loans stay longer on the line, Rubin said, adding that this in turn affects the ability for lenders to originate more loans as the capacity is tied up.
The newer correspondent aggregators are promising quicker turn times. But the traditional warehouse lenders are suspect about these new players and a bottleneck is emerging approving these new end investors as eligible take-outs, he noted. Issues include net worth and experience of these new buyers.
Another problem is that warehouse lenders have returned to the days when there needs to be more than one take-out investor for a loan product before they approve that product to be placed on the line. Rubin said this is true even when the investor is well capitalized.
He spoke of a situation where he finally got a single take-out approved, but the haircut on the loan is greater than typical, requiring the mortgage lender to have more skin in the game.
Meanwhile, the increased turn times are also putting pressure on mortgage lenders to increase the size and/or numbers of their facilities. “It is tight out there, the $10 million lines, they are out there. The banks are fighting each other over in terms of giving the best rates, the best fees, the best everything. But it is all for traditional product,” Rubin said. The warehouse providers are not allowing nonconforming products to be placed on lines and they have not been approving new take-out investors.
Mortgage lenders are concerned about being able to turn their inventory quick enough so they could exist with their current facility, he said.
There are banks giving out those small lines on a noncaptive basis, but hoping that the mortgage lender will sell the product originated on the line to them. Captive lines are available as well.
As for the new players in the warehouse business, the ones that will do better are the ones who go out and hire experience people, “the best and brightest to build a department,” as Rubin put it, instead of trying to morph their existing business lending staff into this niche.
But these new players tend to be conservative and for the most part lend in their parent bank’s retail footprint. The ones who are hiring the more experienced people are more willing to go outside the box, he said.
One of those new warehouse lenders is Silvergate Bank, La Jolla, Calif. In its 2011 yearend results press release, the bank noted it funded $1.4 billion in residential mortgage warehouse loans with total fundings of almost $3 billion since the unit started operating in April 2009.
Elaine Batlis came on board at Silvergate in March 2009 to run the new operation and is currently senior vice president and manager of the warehouse lending division. Prior to that, from 2006 to 2008 she was president of the warehouse lending division at Impac Mortgage Holdings.
She said Silvergate had started with its focus on California, but is now a nationwide warehouse provider, taking advantage of her background at Impac, which had been a nationwide provider.
Success in warehouse lending has exceeded Silvergate’s expectations, adding it came into this business at a good time given the higher quality of loan originations. But the company is conservative in what it will permit to be put on the line.
Confirming what Rubin said, Batlis noted that turn times had been increasing for some its clients at the end of the fourth quarter. But so far, Silvergate is not seeing loans being stuck on its lines.
Nor is it settling at its current size for this line of business. Silvergate is continuing to build its infrastructure for the warehouse unit, Batlis noted.
From the originator’s perspective, Brad Mauritzen, senior vice president of Houston-based Envoy Mortgage, noted that in 2009 mortgage lenders were seeing plenty of business come their way driven by low interest rates, while at the same time, many warehouse credit providers were pulling out.
“Just about every independent mortgage lender in our shoes was doing everything they could do to try to find more funding. The banks were very selective about who they would bring on board.
“We didn’t have a lot of leverage in terms of sizing a line or negotiating terms and conditions. We just needed more capacity and we would take what we could get,” Mauritzen commented.
But by the middle of 2010, things began to loosen up in the marketplace. He feels warehouse providers were more willing to give larger lines and be less restrictive on the covenants. Loosen is a relative term, he continued. The providers are more selective about who they are bringing on board as new customers.
From the independent mortgage banker perspective, they have gone from viewing their warehouse provider as just another vendor they did business with to today “where it is all about the relationship,” Mauritzen declared. “We view them as one of our business partners.”
Both sides look to work with each in order to grow together.
If there is a product that doesn’t fit in the box, he said they can get a small sublimit on the line, but the advance rate is likely to be lower, requiring more cash from Envoy.
Unlike two years ago, lenders today are more likely to get an increase in capacity from their warehouse provider, as long as they have the capacity to support it, Mauritzen said.
During the crisis, there were more mortgage originators seeking providers than available capacity, with any shock to the system—such as the Taylor, Bean & Whitaker/Colonial Bank scandal—causing more consternation.
Today we are back to the point where warehouse providers are seeking clients, Mauritzen said, with Envoy seeing more competitive rates and pricing than a few years ago. But the one area where there hasn’t been much easing by the providers is in net worth requirements, he added.
