Brian Lynch is the founder and president of California -based Advantage Systems
, a provider of accounting and contract management tools for the mortgage banking and real estate development industries. With more than 30 years of experience in the accounting industry, Lynch founded Advantage Systems in 1986 and changed the company’s focus to the mortgage industry in 1991 with the creation of Accounting for Mortgage Bankers (AMB), an accounting system tailored to the loan-level metrics needs of mortgage bankers. He sat down with HousingWire
to let you know how originators are going to survive the warehouse-lending drought.
Warehouse lending is drying up. If you were to compare what warehouse lending was like before the financial crisis hit to where it is now? How striking is the contrast?
It’s no secret that warehouse lending has taken a significant hit during this economic downturn. In regards to the difference, as Donald Trump might say, "Its Huge!" According to the Warehouse Lending Project’s Web site, the number of active warehouse lenders declined from a 2005 peak of more than 115, to fewer than 30 today. The total aggregate capacity of warehouse lending credit has declined to about $25 billion, down nearly 90% from the level reported in 2007. Those are most certainly industry-changing numbers.
Where did it all go
Most warehouse lenders were left holding the proverbial bag when the “Meltdown” began. Some were taken over by larger banks from Countrywide to Bank of America, Wamu to JP Morgan Chase, National City to PNC, but many warehouse lenders were forced to close their doors. There is very high risk associated with warehouse lending and the remaining banks have been slow to take on that risk.
What's happening to those originators cut-off from these lines of credit?
The lack of warehouse lending is hitting the independent mortgage banker more so than the broker. Brokers have their own series of problems: the HVCC is eliminating their control of the appraisal; they have basically lost their ability to charge a Yield Spread Premium, making it difficult to compete against lenders who still can; and many banks are shying away from broker originated business all together.
Independent mortgage bankers are finding it difficult to secure adequate warehouse lines, which directly affects the amount of loans they can originate. Even when a mortgage banker obtains a line, he or she can expect higher fees and much greater review by the warehouse lender. Where in the past, the warehouse lender may have been satisfied with quarterly financial reports, today these are expected on a monthly basis and those financials will be reviewed with much greater scrutiny than in previous years. Loans that stay on the line for more than 45 days won’t just be curtailed as in the past. Instead, the mortgage banker will be asked to buy back the loan in full.
So, is there any hope for them to grow a business?
Brokers have entered survival mode and many have found that becoming a branch of a larger mortgage lender is the best way to stay afloat. In the last two years, we have seen explosive growth in the branch networks of our lender clients, evidenced by the fact that the Web-based branch reporting tool within our Accounting for Mortgage Bankers (AMB) system has seen over 64% growth since Q408.
By becoming a branch of a larger lender, the former broker gains access to both lending capital and operating capital. He or she also benefits from the investment in technology made by the mortgage lender. Those mortgage bankers that have survived are growing. They’re making significant investments in technology to improve compliance and minimize head count. AMB streamlines the relationship between broker and lender by putting up-to-date branch reports at the branch manager’s fingertips. By eliminating the hassle of compiling this data, experienced brokers and originators are able to originate loans without having the responsibility of managing the operational side of the business, while adding to the growth of the lender. It’s a win-win situation.
When do you see warehouse lending making a return? And, perhaps more importantly, from whom?
Every time I pick up a different periodical in the industry I see that some bank is thinking about, or attempting to enter, or re-enter the warehouse space. One day it’s "National City is in," and the next it’s, "no they’re still out." "Met Life is in, maybe." There was a rumor that Chase was getting in. To date, the field of warehouse lenders remains small and will probably stay that way for the foreseeable future. It is encouraging that many Tier 1 banks have been able to pay back their TARP money. While the move may be more for their own control and bottom line, it also suggests that they no longer need those funds, which may suggest that those banks at least have the wherewithal to get back into the warehouse lending arena.