Cultural Shift Helps Market Liquidity

The growing number of community banks starting warehouse lending programs has to be gratifying to the executives at Titan Lenders Corp., Denver. It was just three years ago they were so concerned about the future of this business they called for Troubled Asset Relief Program funds to fill the need.

Now, there is another issue for warehouse line customers to have to deal with, especially those that sold to a correspondent lender. As larger players like Bank of America exit that channel, the mortgage bankers that sold to these companies also got warehouse lines from them.

Ruth Lee, the executive vice president at Titan, said the change in secondary market strategy as a result of what is happening in the market represents a cultural shift for the small and midsize mortgage lender.

But more so, the change especially impacts those who only have one line, and that one coming from their correspondent outlet. These companies are in trouble, Lee said, “and I’ve been able to give a few cautionary tales to people about putting all of your eggs in one basket.

“Just a few years ago, a warehouse lender would look askance if you had more than one line and they would really get territorial about it. Now it is almost considered a failure of insight to not have more than one line.”

As some midsize players shift to a model where they sell to the government-sponsored enterprises, those who are making this conversion look a lot like those who made the change back in 2003 to 2005, she said.

“They really spent the time on their business model. They really spent the time figuring out risk. They really figured out how to retain earnings and to build their business as a mortgage banker as opposed to a sales and origination arm,” Mary Kladde, Titan’s president and chief executive, said. As a result a lot of smaller players are now in the correspondent investor space.

Longer turn times at the larger correspondents are having a financial impact on those small mortgage bankers who sell to them. So they are turning to other firms which might be slightly larger than they are or they are going directly to the government-sponsored enterprises. This changes the dynamic because larger correspondents had provided captive lines to their clients.

Meanwhile, there has been an increase in overall warehouse funding liquidity because the community banks have come into the game. Typically the larger lenders wanted companies with high net worth and an established business model. “Bank of America, for example, they weren’t really going after the guppies. They were looking for the midsized groupers and the whales,” Lee noted.

Kladde added that the people who had run the warehouse operations at the larger players that got out of the business are “finally finding homes at smaller banks than they were at before.” And they have gone right to work issuing lines, with the result being these smaller firms are “filling the gap very easily.”

Lee continued, “There are a lot of really good, strong, regional community banks that are looking to get into this model.” She gave the example of Fidelity Bank of Minnesota. “They are growing by leaps and bounds, and constantly looking to bring on additional sources of revenue and business. They’re even expanding outside of their traditional footprint.”

Another company taking this path is Peoples Bank of West Virginia. Then there is Texas Capital Bank, which Lee said has become a “powerhouse” in the warehouse lending business.

It was only 10 years ago when Texas Capital was one of the little guys. “When liquidity changed, they were able to change their model and adapt to it,” she said.

Texas Capital’s leadership has a conservative approach but “they are very aggressive in marketing. And so they managed to garner quite a pipeline, and it’s very impressive.”

Lee now believes that it is healthy for the mortgage industry that the warehouse credit is not concentrated in a few large firms.

One area where mortgage warehouse credit has not been widely available is for electronic mortgages. But Kladde said that might be changing.

If there is another tightening of liquidity, she explained that the electronic mortgage process speeds up the transaction. The result is that if electronic mortgages take off, originators can do the same amount of transaction but with less liquidity.

Overall, liquidity in the marketplace is a lot better, Lee noted, and we’ve seen the end of the bottom of the warehouse lending crunch.

“A lot of people have learned a lot of good lessons. Now we need the [housing] market to recover. We need a healthy private securitization market and we need the housing market to recover,” she said.

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