|Warehouse Loan' Demand Seen as Outrunning Supply
Independent mortgage companies have been complaining this year of tight "warehouse" credit - short-term bank lines used for funding new mortgages until they are sold into the secondary market. There also have been reports of scarce financing for the acquisition of servicing rights.
A. Donald Pray, chairman of a Robert Morris Associates committee on warehouse lending, discussed these concerns in an interview with American Banker staff writer Phil Roosevelt. Mr. Pray, who heads Bank of New York's warehouse effort, said his institution was planning to expand in the field.
Q.: Is there a credit crunch in warehouse lending? PRAY: I think of it more as a supply-demand imbalance. There's more demand for credit from the independent mortgage companies this year because we've had a surge in mortgage volume due to lower interest rates, increased refinancing, and post-war optimism. In addition, more of the business is fixed-rate, and that's the natural product of mortgage bankers.
On the supply side, it's well known that some banks are having credit problems and real estate lending problems in particular. In response to that, banks have tightened their credit standards across the board. In warehouse lending, terms may be a little tighter, but they are not materially different than what they were two years ago.
Q.: Have any banks been leaving the field entirely? PRAY: We're aware of some major banks that have redirected their warehouse units to help with real estate workouts. And some regional banks have withdrawn because mortgage warehouse departments were part of real estate exposure in sum. Pulling back from warehouse lending was an easy way for senior management to say, "We have reduced our real estate exposure." In fact, they excited their best credits.
Q.: What type of mortgage company has been hurt the most? PRAY: The companies with low capital and small loan volume would be the ones feeling the pullback of regional banks. These companies might have fewer than 30 offices and have high costs of production. Typically, they sell off a lot of servicing, but as servicing prices spiraled down last year, they just weren't making money.
By contrast, the major mortgage companies in the industry have been able to get credit and increase credit, even through this cycle. I know because we've been responsible for marshaling additional credit for people.
Q.: What is Bank of New York doing? PRAY: We're very bullish on mortgage banking in general. We like the industry, and we like the kind of secured credit risk that it produces. We've decided that we are going to increase prudently our number of clients and our outstandings, and to also do servicing-acquisition loans. We think the industry needs more debt capital, and there are people with good-caliber credit who are deserving of finance.
Earlier this year, we sponsored three seminars for foreign banks to educate them on warehouse lending and servicing loans. We're trying to get them to buy participations. Some of them already have, and we're optimistic that more will join in.
Q.: Is credit tight for servicing acquisitions? We keep hearing of people winning the bidding for servicing portfolios held by the Resolution Trust Corp. only to hit financing problems. PRAY: That's true, but what I think is happening is that some people who are winning the bidding have unrealistic expectations about how much they can leverage a transaction. Our advance rates - the amount we will lend - are 50% to 70% of the appraised value of the servicing portfolio. We look for people to have equity to support the balance of the acquisition - and for some people that may seem too conservative.
We would suggest that the RTC simply require anyone who is submitting a bid for a portfolio to show evidence of having cash equal to 30% of their bid price. That would do a lot to expedite the process.
Q.: What trends do you see in the servicing market? PRAY: Right now, we're seeing a swing on the buy versus make decision for servicing. Last year, as purchase prices declined, it became very economical to buy servicing rights. But that's swinging back because prices have gone up. If you're a good retail producer, it's now more efficient to produce the product. For some types of servicing, we had a 30% leap in prices in the first half of this year.
Q.: Why have prices improved so much? PRAY: There are more people looking to buy servicing, more capital being mobilized to buy servicing. We see that in just the number of people who have passed thorough this office.