Mortgage Rates and Warehouse Lending: The Shoe is Dropping

Gordon Banks

As you might expect, the announcement that the Federal Reserve would buy $750 billiion more of Fannie and Freddie mortgage backed securities sent mortgage rates lower immediately.

Zillow Mortgage Marketplace reports that overnight rates fell well over a quarter percentage point. But there is a big barrier standing in the way of even bigger rate drops, and that is warehouse lending. Ok, what is that?

While you hear so much about the big banks like Bank of America and JP Morgan working to offer more loans, the fact is that 40 percent of the residential mortgage market is made up of non-depository lenders. These are mortgage lenders that aren't traditional banks. They tend to be more local, like First Savings of Virginia.

Anyway, these lenders rely on warehouse lending to get the cash they use to give you a loan. Warehouse lenders are large banks or commercial banks.

Here's the problem, explained by Glen Corso of the Warehouse Lending Project.

Over the past several years we've had a reduction of about 90% in the amount of warehouse credit that's available, so that reduction in warehouse credit is coming at the same time that there's a big surge in application volume, and these nondepository lenders are struggling to make the loans that people are seeking from them in order to refinance their mortgages.

Last week a big warehouse lender, PNC'S National City, said it would get out of the warehouse lending business, so did Guaranty Bank, the nation's third largest lender. Remember, these banks need the cash to make the loans before they ever sell them to Fannie and Freddie.

"Until you address this issue there's going to be a big gap between the Fed and driving rates down in the capital markets for mortgages and what the borrower on the street sees as the mortgage rate that comes to them," says Corso. It really flies in the face of everything the Obama administration is trying to to stabilize the housing market.

And just to put it in perspective, warehouse lenders make up 40 percent of the mortgage market, but they make up 55 percent of the FHA market, which is the only game in town for lower income borrowers with greater risk. FHA used to make up 3 percent of all loans, but now, with the death of the subprime lending industry, it makes up about 1/3 of all new loans.

If non-depository lenders can't make loans, then the rest of the industry has to eat up 40% more -- and given the surge in refi applications, thanks to the new low rates, they are struggling to handle it all. Plus, if the big banks get all the business, then what is their incentive to keep rates low? I posed that question to Barbara Desoer over at Bank of America Mortgage.


“The benefits of the government actions to date have led to this favorable rate environment, and consumers are benefiting from those actions ... we anticipate further rate improvements as we and other lenders are positioned to drive aggressive pricing strategies to gain share and generate profitable revenue growth.”

Okay, fair enough. But the Mortgage Bankers Association sent me a letter that they sent to Treasury Secretary Geithner a few weeks back, asking for a short-term federal guarantee of warehouse lines that are collateralized by Fannie and Freddie and FHA. "This assistance is urgently needed to maintain the mortgage funding structure borrowers depend upon, especially borrowers who rely on independent, non-depository lenders."

I'm told a few lenders did get a meeting with Treasury senior staff as well as FHFA Director James Lockhart, but so far no movement. Oh, and Colonial BancGroup of Alabama, the nation's largest warehouse lender as of Dec. 31, 2008 requested funds from the TARP. Stay tuned.

Questions? Comments?