This will be remembered as the year the mortgage industry broke the trillion-dollar barrier.

How this milestone was accomplished and where the capital came from to fund this effort are fascinating stories. Certainly, it began with the emergence of mortgage bankers as a force within the industry. Today, mortgage bankers control nearly 40% of the volume, and our share is growing.

How and with whom mortgage bankers are funding this growth is also changing.

In the early 1990s, commercial banks, our customary source of warehouse funding, were in the midst of a capital crunch. Loans to the real estate industry in particular were coming under scrutiny, as commercial lenders shrunk assets and reduced exposure to real estate risk.

Capital Dried Up

Unfortunately, the warehouse lending units of many commercial banks - which finance lenders' inventories of loans that are on their way into the secondary market - were misplaced within real estate lending units and were denied capital. Since the refi boom was about to begin, this couldn't have occurred at a worse time.

Several trends converged to provide new sources of capital and liquidity. The first was the stock market, which was in the midst of one of its longest rallies. The rally enabled companies like Margaretten, North American, Arbor, AmRes, and Fleet to tap equity markets for the first time. Countrywide also benefited through a series of offerings.

The ability to issue equity substantially strengthened the balance sheets of these companies and increased their financial flexibility.

As commercial bankers pulled back from warehouse lending, Wall Street rushed in.

Much of the funding of the early rounds of refi mania came from companies such as Lehman Brothers, Merrill Lynch, and PaineWebber. Today, the largest street player, PaineWebber Inc., is estimated to have outstanding financings three times as large as those of the largest commercial bank warehouse lender.

Wall Street's incursion into what was once a commercial banking stronghold served as a wake-up call for many bank managers.

Suddenly, there was a new appreciation of the distinction between lending to mortgage originators and the financing of commercial real estate development. Warehouse lines once again became available.

Simultaneously, foreign banks, which had in the past been reluctant to enter the field because of their preference for lending to well-capitalized names, saw new opportunities in lending to mortgage bankers.

The consolidation within the mortgage industry, the opening of the equity markets, and profits from the refi boom added marquee value to the larger mortgage banks. Today, foreign banks are even leading credits.

A few commercial banks have reentered the warehouse lending arena with a more combative attitude. For example, some have threatened not to provide warehouse lines to clients that also extensively use Wall Street financing.

These banks believe they have an advantage over investment banks because they alone can provide funding during the riskier period in which a security is unperfected because all of the documents haven't been forwarded by an escrow agent.

Other banks are trying to shut out nontraditional lenders by requiring that when a term loan is part of a credit facility, all Participants must take a share.

These tactics are questionable. They may temporarily prevent mortgage bankers from accessing the cheapest sources of capital, but eventually Wall Street and others will find new ways to address funding risks.

Instead of trying to restrict their clients, these lenders should consider more innovative approaches that will enable them to price for their additional risks and still compete long term.

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