As I reported about a week ago (3/19 blog), warehouse lending is drying up at a fast clip. This is the money desperately needed by small mortgage banks in order to offer you a mortgage. These mortgage banks don’t take deposits, so unlike the big guys, they need these warehouse lines of credit to do business. As I wrote previously, 90 percent of warehouse lending has dried up since 2006. Just this month several large warehouse lenders announced they were getting out of the business.
Given the problem, mortgage bankers went to Treasury looking for help, and Treasury in turn sent them to FHFA, the regulator of Fannie Mae and Freddie Mac. FHFA says they are now asking for proposals from mortgage bankers as to how Fannie and Freddie might help get the warehouse lending industry off life support. This all comes against a backdrop of increased mortgage applications.
Last week the Mortgage Bankers Association increased its forecast of mortgage originations in 2009 by over $800 billion, now expecting originations to total $2.78 trillion (up 72 percent from 2008). Now before you get all excited that housing is back, the boost is all thanks to the refi boom, not new purchase originations (it actually revised down its forecast there). The MBA will reportedly submit its proposal sometime this week.
Without the warehouse credit, the small mortgage banks will lose even more market share to big full-service banks, and in turn those big banks will be able to charge higher interest rates, since they won’t have as much competition from the little guys. Currently, 40 percent of the residential mortgage market is fuelled by non-depository lenders. That number can’t hold on without warehouse lending.
So how would Fannie and Freddie help?
I’ve asked FHFA, and they’re still getting back to me, but one idea is that they could guarantee warehouse loans, which might make warehouse lenders feel better about the risk involved in lending to mortgage banks.
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