2009-Apr-29 - Real Estate: Warehouse mortgages dry up, hurting borrowers

Warehouse lending refers to the short-term revolving lines of credit that mortgage bankers tap to fund the closing of mortgages before they are sold on the secondary market. Capacity in this area has fallen dramatically, from more than $200 billion in 2007 to about $20 to $25 billion in 2008, the Mortgage Bankers Association reports. That's more than an 85% decline, the industry group points out.

"Who suffers in the end? It's going to be the consumer," said Corr, who attended the MBA's National Secondary Market Conference and Expo in Chicago last week.

Here's why: Because smaller bankers have limited access to these warehouse funds, more borrowers are forced to get mortgages through large money-center banks and the limited set of smaller bankers with warehouse capacity, he said. That, in turn, puts stress on companies that still are able to make loans, as demand heats up to refinance mortgages. Many financial institutions trimmed their staffs during the credit crunch.

"With the demand that is going on right now, with the refi boom, you have way more demand than supply," Corr said. "There is so much demand coming into the bigger lenders, that they don't have the capacity to fulfill those loans."

"What do they do? Supply and demand -- they raise the prices," he added. Lenders can hike costs or increase interest rates.

There have been some recent developments that seem promising, including new commitments from Wells Fargo and GMAC that would add more warehouse capacity to the mortgage market, Courson said. But that's "sort of like a drop of rain in Lake Michigan, in terms of capacity," he said.

Some warehouse lenders have completely gone out of business; others have reeled in lines due to the perceived risk of mortgages today. Investment banks, including the defunct Lehman Brothers and Bear Stearns, also once provided this kind of warehouse lending, Courson said. MBA members really started feeling the impact in the fall, he said.

The MBA is urging Congress and the Obama administration to take steps that would maintain existing warehouse lines and create new ones -- and in turn create capacity to make loans to home buyers and homeowners who want to refinance.

Opening up more warehouse lines would benefit smaller mortgage bankers like Michael Kodsi, CEO of Choice Mortgage Bank in Boca Raton, Fla. While he has access to a warehouse line, securing one in this environment is nearly impossible, he said. Kodsi said he is extra diligent in meeting requirements to retain the warehouse funds he currently is able to access.

"I'm always nervous because I can't control what is happening on Wall Street," he said.

In the current environment, the time it takes to underwrite a mortgage is "ridiculously long," Kodsi said. He's finding the mortgage process especially difficult for home buyers seeking mortgages to buy condos in his Florida area. And it isn't unusual for it to take two to three months to refinance in some instances, as underwriters require additional information from borrowers about their finances, he said.

Even with near record-low mortgage interest rates recorded by Freddie Mac and MBA, the imbalance between mortgage supply and demand is affecting pricing, making loans more expensive, Courson said. "Borrowers are not able to enjoy the full effect... because lenders have to ration their dollars, and they're using rate to do that," he said.

While it's always important to shop around for the best mortgage rates, current conditions perhaps underscore that point even more, Courson said.

Don't rule out credit unions, either, said Mike Schenk, senior economist for the Credit Union National Association.

Even as the economy is struggling, credit unions are expecting to increase their overall lending by 6% in 2009 compared with 2008; real-estate lending by credit unions is expected to grow 12.1% year over year, according to CUNA. Partly because credit unions largely didn't make riskier loans -- including those that didn't require full income documentation -- these institutions are in a better position to lend, Schenk said.

Regardless of where you choose to shop for a mortgage, remember if something "seems to good to be true, it probably is," Schenk said. Also, factor in all costs as you compare mortgages; compare loans by APR, not interest rates, he added.

Real Estate: 'Warehouse' mortgages dry up, hurting borrowers