One of the questions we ask CEOs during our FOCIS –plus review is:  What do you think are the key risks confronting you in the next couple of years and how will you address them? 

Without a doubt the largest risk is warehouse lending.  The shrinking number of warehouse lenders has been a challenge for all mortgage bankers.  A mortgage banker without a warehouse facility is like trying to drive a car without an engine.  Without the engine, the car sits idle.

Mortgage bankers profit opportunities depend upon selling loans to investors who take several days to review and purchase loans.  Generally, these investors don’t provide the financing for this gestation period.  It’s critical for a mortgage banker to have an interim financing facility to fund these loans ,and commercial banks have been the main players in the past to provide these facilities.  With the decline in active warehouse lenders, some secondary market investors have moved into the warehouse lending business.

The investors who do provide lines many times limit mortgage bankers from selling loans to other investors.  This limitation can reduce profit margins for mortgage bankers because they can’t obtain best execution at loan sale.  Most of the mortgage bankers we see today have one and maybe two of these “captive lines” with the large secondary market aggregators. When there are no other alternatives, captive lines are a key solution to survive as a mortgage bank. 

Another aspect of warehouse lending risk is the ever increasing requirements and limitations imposed on mortgage bankers.  In the past we might see a net worth to warehouse line ratio of 15:1.  As the number of warehouse lenders declined, we’ve seen the leverage ratio decline to 12:1 and lower.  Liquidity requirements have increased with a larger amount cash being required on the balance sheet.  Some warehouse lenders restrict the use of mandatory commitments to manage interest risk and others limit the percentage of broker originated loans. 

As these changes occur, mortgage bankers are scrambling to adjust.  Some are raising capital to meet higher net worth and liquidity requirements.  Some are changing their business model and moving away from TPO business.  And others are partnering with large mortgage banks and depository institutions. 

Warehouse lending risk continues to be on the minds of every mortgage bank CEO.  Adapting and adjusting is critical to survival.