The Mortgage Bankers Association is calling on the government to guarantee warehouse lines of credit that provide independent lenders with short-term funding to originate loans.
Warehouse lending capacity is about one-tenth what it was two years ago, having shrunk from $200 billion to between $20 billion and $25 billion, said MBA president and CEO John Courson in an editorial published by The Washington Times.
Warehouse lenders provided intermediate funding for some of the riskiest loans made during the housing boom, including subprime and alt-A loans packaged into "private label" securities and sold to secondary-market investors.
But the contraction in warehouse funding capacity is also limiting the ability of lenders to meet the current demand for refinance loans, Courson said, and has a "devastating" impact on homebuyers, sellers, builders, and "every other entity in the homebuying process."
Warehouse lines provide funding for about 1,000 independent, non-depository lenders. The number of active warehouse lenders providing funding to non-depository lenders has dwindled to about 10, Courson said, compared to 30 in 2007. Reduced competition means higher interest rates and fees for borrowers, along with longer wait times, Courson said.
Big banks like Wells Fargo and Bank of America, which can loan against their deposits, are grabbing a bigger share of the mortgage lending market.
At the same time, banks are scaling back or eliminating warehouse lines of credit to independent mortgage lenders. After acquiring Washington Mutual, J.P. Morgan Chase & Co. shut down the bank’s warehouse lending division.
But lenders who rely on warehouse lines of credit still account for more than a quarter of all residential mortgages, Courson said, and 50 percent or more of mortgages backed by Federal Housing Administration loan guarantees.
Policymakers could address the funding shortage by providing a short-term guarantee of warehouse lines that are collateralized by Fannie Mae, Freddie Mac, FHA and Veterans Administration loans held for sale by mortgage lenders, Courson said.
The Wall Street Journal reports that the Federal Housing Finance Agency is considering using Fannie Mae and Freddie Mac to guarantee debt issued by warehouse lenders — a step Courson maintains would not require Congressional approval. …CONTINUED
Bank regulators could also reduce the amount of capital banks are required to hold against warehouse lines of credit, the MBA says. In a March 24 letter to Federal Reserve Chairman Ben Bernanke and bank regulators, Courson said many banks are exiting warehouse lending in order to shore up their risk-based capital positions.
Winding down warehouse lending "is a quick way for a bank to improve its capital position," because loans are generally turned around in less than 20 days, Courson said.
Reducing the risk weighting assigned to the loans from 100 percent to as little as 20 percent for loans slated for purchase or guarantee by Fannie, Freddie and FHA could make banks more willing to keep their warehouse lines open, the MBA said. The group does not propose relaxing capital requirements for "private label" residential, commercial and multifamily loans not backed by the government.
While some banks have scaled back warehouse lines or exited the business altogether, Wells Fargo is reportedly planning to jump back in after a five-year absence. Bloomberg reports that Wells Fargo is considering investing up to $4 billion in a warehouse lending unit, which would compete against Comerica Inc., U.S. Bankcorp and Colonial BancGroup Inc., among others.
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