Eighteen short months ago it appeared that warehouse credit was drying up with nonbanks paying dearly for lines—if they could even find one.
But now the tables may be turning in favor of nonbank borrowers: several regional banks have entered the warehouse space, offering better terms and more liberal financing—at a time when originations are coming under pressure.
In short, borrowers are in a better position.
"I'm working with a number of [nonbank] clients who are looking for ways to reduce their warehouse costs," said Michele Perrin of Perrin & Associates, an advisory firm based in Irvine, Calif.
She noted that as part of the "renegotiations" with their bankers, some of her clients are being offered lines on jumbo loans and "no-strings-attached deals." (A no-strings-attached deal is a reference to warehouse providers that only extend credit if the primary originator agrees to sell a majority of its production to the financier.)
Also, some of her clients are consolidating lines, canceling credit that they won't be using any time soon.
During the first two months of the year, originations were off by up to 60% at some firms. "Our volume is dictated by their volume," said one warehouse executive, requesting his name not be used. "If they're not doing well, we're not doing well. It's all the same."
In early March, thanks to a slight drop in rates, applications were once again beginning to increase, offering hope to both mortgage lenders and their bankers. Still, few think that loan production in 2011 will match last year's level of $1.6 trillion, which means lower profits for warehouse providers, too.
"I think a lot of warehouse firms are behind the eight ball right now," said Paul Best, senior vice president of warehouse lending at People's United Bank, Bridgeport, Conn. "There might be a real scramble for some of these guys to make their budgets."
But Best, for now, isn't worried about his business. He joined People's late last year from PNC Bank, which was in the process of exiting the warehouse sector. Since leaving the Pittsburgh bank, he's brought over several of his former clients to People's and has already signed $100 million worth of new deals.
"I'm dealing with a lot of former customers so we're fine," he said. "But I do think this could be a trying year for others."
Jerry Davis, senior vice president of ViewPoint Bank, said his business appears to be holding up, but acknowledges challenges are ahead. "There's new players out there, undercutting in an attempt to build market share," he said.
Warehouse "usage rates" are running at 45% compared to a typical rate of close to 70%. "I haven't heard of any warehousers getting out of the business," he said, "but if they do it will probably be some of the new kids."
