A Houston start-up bank is getting into the mortgage warehouse business, and some consultants are advising other community banks to consider doing the same.
With more than $200 billion of warehouse lines evaporating this year, the mortgage industry is under extreme strain, said James Reynolds, the managing partner of the Reynolds Group, a consulting firm in Summit, N.J.
By providing such financing to home lenders, community banks could better capitalize on a recent surge in refinancings — if they can manage the risks well — said Mr. Reynolds, whose firm advises warehouse lenders.
"It's one of the best times to get into this business that we've ever seen," he said. "The opportunity for significant profitability is very high."
Allegiance Bank Texas in Houston said it intends to expand its fee income by offering mortgage lenders a temporary place to put their loans.
The $198 million-asset Allegiance — which hired some bankers experienced in warehouse lines when it opened last year — began testing the market about two months ago by bringing in two mortgage lenders as customers.
Though Allegiance did not initiate a warehouse line at that point, it has been approached by more mortgage lenders looking for one since then and, two weeks ago, decided to create one.
"We have money to loan, and the market is sending customers to us because we have people on board with experience in this," said Daryl Bohls, Allegiance's president.
Besides the demand, Allegiance felt encouraged by the Treasury Department's announcement that Fannie Mae and Freddie Mac would begin buying more securitized mortgages. Allegiance only warehouses mortgages for a short time before the lender must sell them to a third party. The increase in government purchase authority reassured Allegiance that the lenders using its warehouse line would continue to find buyers for their mortgages.
Mr. Bohls said he expects the business to be lucrative because competition is lacking, borrowers are agreeing to stricter underwriting standards than in previous years, and pricing is up.
The typical file fee has more than doubled, he said. Allegiance charges a $250 fee for each loan, plus interest.
"You used to charge $100," Mr. Bohls said. "Now I can command whatever I want because nobody is doing this and mortgage companies are starving for a place to warehouse their loans."
Mr. Reynolds said Wall Street companies that had stored mortgages in warehouse lines before securitizing them fostered a culture of loose underwriting and thin pricing.
"Wall Street created an environment that was too high-risk for the type of business it was," he said. "They're gone. Now the market has returned to a more rational and prudent approach."
But there is a downside. Mortgage bankers are so concerned about the lack of warehouse capacity that the Mortgage Bankers Association recently formed a special task force and is seeking a meeting with Treasury officials to discuss the issue.
A handful of other community and regional banks have begun to tiptoe back into mortgage warehouse lines in recent months. ViewPoint Financial Group in Plano, Tex., started an operation this summer, and the $2 billion-asset company's CEO, Gary Base, said it has had "a very, very good experience."
Mr. Base said the company now has about $100 million in its mortgage warehouse portfolio and feels it can safely and easily quadruple that amount.
"We saw an opportunity in the market where the demand was there but the suppliers weren't because of the exit of several different banks from this product line," he said. "We think this is a great opportunity, but you don't want to place your whole bank's bet on this one item."
Mr. Bohls said Allegiance intends to expand its mortgage warehouse portfolio to be about 20% of the bank's loan portfolio during the next year. Mortgage lending customers typically keep deposits equal to 5% to 10% of the warehouse line in his bank, he said.
"That helps bankers grow both sides of the balance sheet," he said.
Like others that have started warehouse lines, Allegiance significantly tightened the standards for loans it will warehouse. Mortgage lenders keeping funds with Allegiance must have a net worth of $500,000, errors and omissions insurance of $1 million, and book only prime mortgages made on homesteads; they also must give personal guarantees on every loan.
Joe Rizzi, a senior investment strategist at CapGen Financial Group in New York, said higher standards will be crucial for banks introducing credit lines for mortgage producers.
"All the mortgage warehouse lines dried up because people were [suspicious] of the paper they were getting," he said. "They better know [their customers] very, very well and do proper due diligence … . There is a reason not many people are doing it — it is risky."
Mortgage lenders have been known to "push the envelope" in order to book more loans because they don't keep the risk on their own books, Mr. Rizzi noted.
Mr. Bohls said Allegiance insists that a lender seeking a warehouse line have a reputable buyer lined up before his bank agrees to warehouse a mortgage.
This has already proven a good policy. His bank was approached by a mortgage company that said Sanderson State Bank in Sanderson, Tex., would buy its mortgages. Allegiance declined to accept the mortgages on its books — a good move, since Sanderson failed Dec. 12, Mr. Bohls said.