In the latest aftershock from the collapse of the subprime mortgage business, bank lending to the mortgage industry is getting tight.
Warehouse lenders-banks that supply interim financing while mortgage banks wait to sell home loans in the secondary market-are reexamining their portfolios, raising prices, and requiring stricter terms and more disclosure, experts say.
Though the banks are most concerned about subprime lenders, they are also clamping down on loans to traditional mortgage companies. If the trend persists, it could place small independent mortgage banks at a serious competitive advantage in home loan originations.
"Nondepository mortgage banks need warehousing to operate," said Michael McMahon, an analyst at Sandler O'Neill & Partners and a former warehouse lender. "Without it, you're out of business."
The pullback began last year, when subprime lenders were thrown into turmoil by volatile capital markets and rising prepayments on home loans. That led warehouse lenders to reassess their ties to subprime lenders, bankers say. And the tightening has since extended well beyond the subprime sector.
"Numerous banks are taking credit losses in an industry where they're not expected to take credit losses," said Robert Salcetti, managing director of corporate mortgage finance at Chase Bank of Texas, a unit of Chase Manhattan Corp. "As a result, you may see some banks exit lending" to mortgage bankers.
Accubanc Mortgage, a Dallas company that lends mainly to A-quality borrowers, is one mainstream lender already feeling the pinch. Over the last six months some of its lending banks have reduced their exposure to the company, said William R. Starkey, chief executive officer.
"When these warehouse lenders start getting in trouble in one area, they'll start tightening credits, and everyone's going to pay for it," Mr. Starkey said. He added that his company's lines were hurt by the merger of BankAmerica Corp. and NationsBank Corp. Both banks had lent to Accubanc in the past, but the merged company reduced its exposure.
Banks had $37.2 billion in warehouse lending commitments at the end of August, the last period for which data is available, according to National Mortgage News. The lines are usually secured by mortgages held for sale.
Such arrangements are often the lifeblood of small mortgage companies that don't have deposits to fund their loans or high enough credit ratings to borrow on an unsecured basis.
Bankers say the full extent of the crunch will not become clear until credit lines come due over the next few months.
But warehouse lenders have clear cause of concern: A string of subprime lenders have been forced into bankruptcy since the summer. The most recent casualties were United Companies Financial Corp. of Baton Rouge, La., which left 22 banks holding the bag on $850 million of unsecured debt, and an operating subsidiary of FirstPlus Financial Group in Dallas.
As a result, some banks are taking smaller positions in syndicated warehouse lines, while others have imposed moratoriums on further lending to subprime mortgage companies, said Mr. Salcetti of Chase.
"We've been more focused on our portfolio since the meltdown of the capital markets," said Frank Hattemer, managing director of warehouse lending at Bank United in Houston.
Bank United has been trying to advance borrowers a smaller percentage of the value of the collateral, and to raise its pricing, Mr. Hattemer said.
Larry Pendleton, managing director of warehouse lending at RFC, a division of GMAC, said he expects banks to require borrowers to hold mortgages for shorter periods of time, and to line up committed buyers for their loans before they get warehouse financing.
In the next six months, "most lines will mature and be up for renewal or extension," Mr. Pendleton said. The facilities are usually set to expire between March and June, because it usually takes borrowers three months to put together their yearend financial statements.
"If there's going to be action taken by lenders, it will probably be done within this period," Mr. Pendleton said.
Even companies that have not had any problems with their underlying businesses say they are feeling the side effects.
If the credit supervisor at a warehouse lender has 30% to 50% "of his loans in some type of restructuring, that attitude is going to carry over even to companies that have no problems at all," said Robert K. Cole, chairman and chief executive officer of New Century Financial Corp., an Irvine, Calif., subprime lender.
Though New Century's warehouse bankers have not raised interest rates or fees or changed borrowing conditions, they have been asking more questions and "showing a heightened level of concern because of the trend in the sector," Mr. Cole said.
New Century's relationship with U.S. Bancorp in Minneapolis, which is both the lead bank in its warehouse line and its largest shareholder, has "elevated the confidence level of the other nine banks" in the warehouse line syndicate, Mr. Cole said.
