Warehouse credit for nonbank borrowers is probably the most plentiful it’s been since financial markets melted down three years ago. Banks, both large and small, have entered the sector, realizing strong profits can be made for little risk.
But there’s been just one little hiccup in the warehouse market this year: the nation’s independent mortgage banking firms aren’t as thirsty as they used to be. “Our commitment level is at about $800 million,” said Jerry Davis, senior vice president in charge of warehouse at ViewPoint, “but our average outstandings are down by about 30%.”
Welcome to the new world of warehouse finance, one where nonbank mortgage firms still want—and need—credit but keep their facilities (borrowings) open for shorter periods of time, which translates into lower profits for the banks extending the lines.
But don’t for a second think warehouse lending is about to enter another period of upheaval. Over the past year just one bank—SWS Group of Dallas—has scaled back in any noticeable way. (Although the bank holding company has declined to talk about its business, competitors say SWS Group’s cutback isn’t tied to warehouse at all, but unrelated problems in commercial real estate.)
“This is still a great business to be in,” said Larry Charbonneau, managing director of Charbonneau & Associates, an advisory firm that works both the warehouse and investment banking sectors. “We are seeing the best collateral we’ve seen in 30 years.”
Among other things, Charbonneau estimates that at least six banks have entered the business since the fourth quarter, including MetLife Bank, People’s United and Republic Banking & Trust. “And there’s still new banks looking to get in,” he said. “I talked to two this week.”
According to figures compiled by this publication, commitment volumes fell by about 6% in the first quarter to $33.9 billion compared to the fourth quarter, not a large drop when you consider that industrywide originations fell to $353 billion from $544 billion, down 35%.
Then again, a “commitment” to lend is just that. Warehouse providers earn fees on open lines of credit, but the real money comes when those commitments are drawn upon and left open. “Last year usage at our shop was at 55%,” said Davis. “Right now it’s at 35%.”
Meanwhile, the top-ranked players have not changed all that much. Bank of America and Wells Fargo, ranked first and second, respectively, in terms of commitment levels at March 31 with $13 billion and $5 billion.
However, both figures are estimates as these two megabanks (for some unexplained reason) like to keep the number a secret. (NMN’s estimate is based on interviews with competitors. Our estimates have not been disputed in previous quarters.)
B of A and Wells, traditionally, have linked commitments to their correspondent purchases.
Their model generally involves extending lines of credit to nonbanks with the stipulation (not always cast in stone) that an originator receiving a short-term loan from them must turn around and sell the product to them as well.
Most of the new entrants to the business—the community banks, especially—don’t use that model, but require the nonbank funders to be located in the bank’s retail footprint. Then again, this requirement is loosening as well, a sign that competition for customers may soon grow even fiercer.
