Buyout Trend Forces Warehouse Lenders To Fight for Lives

As large independent mortgage companies go the way of the dodo, the companies that extend lines of credit to them are scrambling to stave off their own extinction.

Banks buying up mortgage companies in the last two years have cut into these lenders' customer bases. Wall Street firms and superregional banks have identified warehouse lending - loans to fund mortgages awaiting sale in the secondary market - as a business they want to be in.

As a result, veteran warehouse lenders are feeling the squeeze. Some have gotten out of the business entirely; others have been forced to do business with smaller companies than they would have just two years ago.

Residential Funding Corp., a Minneapolis-based loan securitizer and one of the largest warehouse lenders, has seen its customer base erode as regional banks have voraciously acquired its customers, mortgage banking firms. In the last year, for example, Residential Funding lost five customers that were acquired by First Tennessee National Corp., Memphis.

"That account officer felt like he was snakebit by them," said Larry Pendleton, managing director at Residential Funding, a subsidiary of General Motors Acceptance Corp. Residential Funding has since expanded the kinds of loans for which it will extend credit.

Since 1994, some of the largest mortgage companies have been acquired. American Residential Mortgage Corp., Margaretten & Co., Medallion Mortgage Co., and Directors Mortgage Loan Corp. all were bought by banks.

During past lending downturns, mortgage companies either reduced the number of warehouse lenders they borrowed from or borrowed less from each. But observers say warehouse lenders' current difficulties are likely to be permanent.

Michael P. McMahon, a former vice president at First Interstate Bank who managed the mortgage warehousing group, said the lenders most likely to survive the downturn are those that offer a variety of products to mortgage bankers, who themselves face shrinking profit margins and want to make more profitable loans.

Warehouse divisions at banks with internal mortgage units are more likely to understand and support the warehouse business, and are therefore more likely to offer the more diverse selection of products that customers seek.

One bank has left the business entirely. Wells Fargo & Co. eliminated First Interstate's warehouse division after it acquired the Los Angeles- based bank earlier this year. According to industry sources, Citibank has also stopped making warehouse loans. Citicorp did not respond to phone calls seeking comment.

Others have had to undergo a metamorphosis to stay in business.

For example, Residential Funding's customer base has changed during the last two years. Mr. Pendleton said 40% of his customers are now small companies, 40% medium-size, and 20% large mortgage lenders. Just two years ago, his customers were equally divided among small, medium, and large mortgage companies, he said.

Norwest Mortgage Corp., Des Moines, a subsidiary of Minneapolis-based Norwest Corp., has bought a number of mortgage companies in the last two years, successfully taking them out of the customer pool for warehouse lenders.

In an effort to do more business, warehouse lenders now also seek business from those they would have overlooked before.

Bank of New York Co., for one, talks to small lenders that it previously ignored, said Marci Shapiro, senior vice president and head of the bank's warehouse lending department.

Ms. Shapiro said getting customers today is not as easy as it was 10 years ago, when she started. "We've had to be better marketers and have to hit the pavement again," she said.

Wall Street firms and superregional banks have turned competition up a notch in the last two years, industry insiders say. Mortgage bankers' access to equity markets to raise funds has also cut into business.

Countrywide Credit Industries, Pasadena, Calif., the parent of the largest nonbank-owned mortgage company, Countrywide Home Loans, frequently raises money with stock sales and commercial paper. North American Mortgage, Santa Rosa, Calif., the second-largest independent lender, is also public and issues stock.

In the face of competition, mortgage companies have expanded their product lines. Warehouse lenders have adjusted to accommodate those products.

Some lenders now extend credit for loans they once avoided, said Bill Lindquist, managing director at First National Bank of Chicago. For example, the bank now funds lenders that make so-called B and C and home equity loans, Mr. Lindquist said. A few years ago, First Chicago only funded lenders for traditional single-family mortgages.

Mr. Pendleton of Residential Funding said Wall Street's competitive prices forced him to cover lenders for riskier - but more lucrative - products, like B and C and home equity loans.

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