To the Editor:
I have read many articles concerning the lack of liquidity in the warehouse banking sector, but they only served to underline that liquidity is a serious issue for the resurgence of home buying and refinancing.
To date no one has spelled out the financial benefits for a bank to enter this lucrative lending space. Bankers in this country need to know that this type of lending is very profitable, risk-mitigated and increases DDA and CRA credits, especially compared to any other type of commercial lending.
Without warehouse banking for the small to midsize mortgage banker, the megabanks such as Well Fargo, Chase and Bank of America will control the market place.
Participation in this sector will assist the economy in rebounding.
The truth is there are many compelling reasons for banks to enter the warehouse banking space.
- Warehouse lending to FHA Full Eagle mortgage bankers is risk-mitigated. Mortgage bankers must have two years of certified financial statements and go through a rigorous approval process by HUD. Banks should not fund a loan for a mortgage banker unless they have the insurance certification, have an approved megabank take out and also prefunding due diligence.
- If structured as repurchase agreements they are "off balance sheet" and do not affect capital ratios, as they are only on the books for two to 15 days. Structured as a true sale of underlying loans, they create a bankruptcy remote asset that can be hypothecated and resold, providing leverage opportunities. Commercial loans require 100% reserve, whereas if structured as repurchase agreements they would require only a 50% reserve, since these loans will be boarded as individual single-family loans, because the bank owns the asset that is in compliance with regulations regarding loans to one borrower.
- ROE just for warehouse lending is above 30% within 12 months, as the net spread is at least 3.25% (note rate minus cost of funds) and turns twice per month.
- Warehouse banking promotes building noninterest demand deposits. Each mortgage banking client must deposit up to 5% of line as compensating balances and as a reserve against any losses.
- Warehouse bankers earn CRA credits as well as build positive economic activity in areas the bank lends through residential financing.
- Commercial and consumer-type loans earn a much lower ROE for the bank than warehouse lending. Also, if a bank chooses to enter the GNMA market and become an issuer, it realizes a ROE of 100% within 12 months, assuming it purchases 50% of the loans off the warehouse line and sells them as GNMA securities, service retained and/or service released.
- Warehouse banking is not capital-intensive. With initial capital of $2,350,000 and total capital for 10 months of $18,550,000 the returns would be 32% for warehouse lending only, and over 100% including correspondent purchasing and GNMA securitization. Pretax profits by the end of year two will be over $100,000,000 with no further capital investment.
- Warehouse banking is very transparent. All originations submitted by client mortgage bankers must be underwritten to very specific credit guidelines and must be done via desktop software. All mortgage bankers must have E&O and fidelity coverage of $1 million minimum, a quality-control plan, compliance audit guidelines and use risk-mitigation engines. These practices are crucial in mitigating fraud.
If liquid and well-capitalized banks better understood these points, they would not shun the opportunities in today's warehouse lending sector.Barry Epstein
Los AngelesEditor's Note: The writer is a former senior vice president of Ocwen Financial Services.