Q: How would you categorize the state of today’s warehouse lending sector?
Stanley Street: We’re definitely a long way from the depths of the housing crisis, when the warehouse sector was almost battered into nonexistence. Warehouse lenders are still in tough times, however.
Because of the relatively high yields involved with warehouse loans, many small and mid-sized regional banks entered the business. That’s great, because originators—and the market—need that liquidity to keep the production churning. But there’s now an oversaturation of funds available and lower warehouse utilization rates; that is, mortgage bankers aren’t using all of the warehouse funds available to them. So you have warehouse lenders chasing thinner margins and offering aggressive pricing. Competition is fierce.
Yet overall, demand is strong. Warehouse lenders are filling the industry’s needs as loan production increases and mortgage bankers move back toward profitability. At the same time, they are also bringing an increased level of scrutiny and due-diligence to the operations, policies, and controls of mortgage bankers, too, which I believe is a good thing. This additional layer of oversight by the interim lending community can only help in the effort to bring securitization capital back if and when the GSE conservatorships formally end.
Q: What is your opinion on the CFPB’s mini-correspondent policy guidance?
Stanley Street: What’s interesting about the CFPB’s guidance is that it is not actually new. These are the same TILA/RESPA rules that were created several years ago that are simply getting higher scrutiny now that the CFPB is in action. It seems there is still room for the “broker to banker” group under the CFPB’s guidance, but the CFPB will likely be monitoring this segment closely to make sure the spirit of the CFPB’s mission is served, not just the letter of the law. To me, that means entities that fall into this group ought to have specific infrastructure guidelines and a migration business plan, and these pieces must be monitored and well executed.
I think the CFPB needs to be careful not to disrupt the secondary market unintentionally. Right now, however, they seem to be acting even-handedly, and I believe the increased oversight and the mini-correspondent “reminder” that they need to follow the rules is a good thing. In that sense, the CFPB’s guidance highlights the need for vigilance and risk-mitigation for all parties involved in the mortgage transaction.
As far as warehouse lending is concerned, a correspondent lender that uses its own warehouse line simply to steer business violates the spirit of RESPA, and it’s clear those days are numbered.
Yet there is a misconception out there that a correspondent lender and a warehouse lender that share the same roof automatically increases RESPA risk, which is just not so. At the end of the day, warehouse lending is a commercial credit facility, not a quasi-residential funding facility. All the lenders I know manage their relationships with clear and solid business practices that support a viable and compliant funding support mechanism for the independent mortgage bankers that need them most.
Q: How is technology reshaping the depth and scope of warehouse lending?
Stanley Street: Technology has allowed warehouse lenders to improve their service levels, which is their chief differentiator now that prices have become so competitive. Technology has also allowed warehouse lenders to streamline their workflows while at the same time providing increased risk mitigation. At a more basic level, technology is a great leveler. Not to toot my own horn, but my company has personally helped dozens of small and mid-sized banks into the market with our Warehouse Lending System (WLS) platform. With very little cost or difficulty, WLS has opened the door to warehouse lending for small banks, and as a result, the warehouse segment has become extremely diverse.
What’s next? Now that the CFPB is exploring the benefits of electronic mortgages (both for the improved consumer experience and for their own automated compliance monitoring), we may finally see some movement and support for electronic warehousing. I think that would be a great thing.
Q: Will we see more players in the warehouse space in the near-future?
Stanley Street: Not in the near future. Utilization of warehouse funds is picking up, but there has not been enough volume to tip the scale in favor of new entrants, especially with competition still very tight and with the current oversaturation of funds. There are, however, many potential players waiting on the sidelines for origination volumes to increase so they can pull the trigger.
One thing warehouse lenders have going for them is their appetite. Many warehouse lenders I talk to have been enthusiastically pursuing non-traditional products, including non-QM loans. These loans have the potential to offer more attractive yields and, by most accounts, have a significant pent-up demand. If mortgage bankers and warehouse lenders are able to connect on non-QM loans, this could help the return of private capital and give the housing recovery a shot in the arm. With the MBA and other groups predicting mortgage volume to rebound in 2015, it will be interesting to see how this plays out.
Stanley Street can be reached at firstname.lastname@example.org.
Phil Hall has been (among other things) a United Nations-based radio journalist, the president of a public relations and marketing agency, a financial magazine editor, the author of six books and a horror movie actor. Also, as you will discover, he is not shy about stating his views.