New Entrants Eye Providing Credit Facilities-But Are Being Cautious

By Brad Finkelstein

If the changes in the warehouse lending business could be summed up in a phrase it would be this: "What a difference a year makes."

Today, several new bank players are either entering the warehouse space or contemplating such a move, according to David Lykken of Mortgage Banking Solutions, Austin, Texas. His firm has assisted three banks start their own programs. "They are not the biggest warehouse lenders in the world, but we are helping them get the business up and running."

One such client is Northpointe Bank, Grand Rapids, Mich. Lykken helped the depository establish its program, and assisted in picking the executive managing the effort.

Community banks of various sizes or the "banks that bank other bankers," Lykken said, are the ones entering the sector. "The good news is there is capital flowing back into warehousing," he said, describing his feelings about the business as "cautious optimism."

Bob Rubin, principal of the Business Loan Connection, Southfield, Mich., knows of at least three new players.

"However, there are strings attached," he said. Like Lykken, he is seeing community and regional banks stepping in, but these lenders are charging what might be considered steep prices (historically speaking) for credit.

Many of these new players also are re-underwriting each loan file and in some cases rejecting mortgages that already have an end investor in the secondary market. Although standards can be strict for new entrants, these banks fear getting caught with bad loans that were funded with their lines.

Nonbank lenders in need of credit, or even loan brokers trying to partner with nonbanks, "are wandering around in the dark," Rubin said. Some bank lenders are offering lines with terms that may seen wonderful on the surface, he said, but are, in fact, "frighteningly bad."

Interestingly, several large commercial banks (that aren't already in warehouse) are showing little inclination of getting in. Most of the activity, according to advisors who play in the space, is coming from community and regional banks. And the megabanks that are looking to expand, said Lykken, are being very careful.

Current players are still being careful on granting warehouse credit with interest rates on lines (and fees) at historically high levels. And not surprisingly, there can be tight restrictions on what type of loans can placed on the lines. In particular, some lenders, including JPMorgan Chase, will not provide warehouse credit on broker-sourced loans.

Also, some warehouse providers are only banking lenders that are selling whole loans in the secondary market, with flow delivery on a "best efforts" basis. Lykken said this is because the warehouse lenders are saying they don't understand hedging and are leery of it.

"Because there is such a need, a demand, for warehousing, they are able to pretty much dictate the game as it relates to fees and interest

rates," he said. "The days of a positive spread, unless you have got a very large net worth, are gone." There could be some positive arbitrage using the line but in most cases the net interest margin is neutral or negative.

The formula on haircuts has not changed as far as he has seen. Banks also are telling clients if they want a line the nonbank must keep a certain amount of cash in deposit with the bank. Rubin says some banks are solely interested in creating a deposit relationship with these nonbank customers.

For borrowers seeking lines lenders are being tougher, demanding personal guarantees and being less flexible about net worth requirements. But most owners with substantial net worth are getting lines. Still, the time it takes to secure a line can take months longer than expected. Rubin has one customer who has been looking for a line, "a wonderful company" that in August will be under consideration by a provider for one full year. The company will get what it needs, but only after going through a high level of scrutiny.

On the other hand, another client got a $200 million line after just three weeks. But this company is highly capitalized and well managed. "What's happening is going to separate the boys from the men," he said.

Rubin adds that if he were giving advice to those seeking a line, it would be "load yourself up with capital. If you have experience and you know what you are doing, coming into the marketplace with $1 million isn't going to do it. Do something to make yourself stronger than you are now."

Warehouse lenders, meanwhile, are being more aware of stale loans remaining on the line. Mortgage Banking Solutions is advising clients to stay on top of stale loans, because it can be an early warning sign that there might be a problem going on at the mortgage banker.

In today's market most loans funded by warehouse lines are vanilla: Fannie, Freddie and FHA approved, which means if there is a stale loan fraud or another issue could be involved. When a loan remains on the line, the warehouse lender notices and tries to work with the primary funder. Problems occur when the mortgage banker ignores the problem and does not communicate with the warehouse provider, said Lykken.

Rubin notes that warehouse providers do not want any surprises, especially if the company they lent to happens to be fighting buyback requests from the agencies.

Right now, "it is a land of perfect. Everyone wants Mr. or Mrs. Perfect Customer. My $200 million client was such a customer. They were perfect, they never had a buyback. Years ago, I was told, you only want to do business with people who don't need you and that's what everyon is looking for," he said.

For those who are making warehouse loans today, it is the "best of times," said Lykken. "These are record-earning years for warehouse banks. This is a very profitable business. It is so darn profitable right now, it is crazy not to be doing the business