Ever wonder why the government and consumers never saw the mortgage meltdown coming? Meanwhile, experienced mortgage bankers like Bill Dallas were closing up shop (Ownit Mortgage-December 7, 2006). As it was in late 2006, sometimes the nuances and intricacies of how mortgages are actually financed can escape the comprehension of consumers, media, politicians, and sometimes even our financial regulators.
We may just be entering into another similar quandary. One that, like the subprime crisis, may accelerate into a crisis because we lack understanding to see its emergence. Could evaporating warehouse lending capacity seize up mortgage purchase and refinance markets? Is it possible that an emerging “bottleneck” in funding will sabotage federal mortgage rescue programs (i.e., FHA mortgages) and send homeowners into foreclosure that could have refinanced that ARM reset?
The Mortgage Bankers Association (MBA) is raising the red-flag, but there is little reaction from Washington or the mainstream press. Statistics cited by the MBA in a recent letter to federal banking regulators [pdf] and similar commentary in the Washington Times seem to indicate a tempest on the horizon.
The MBA letter places in context the relationship of warehouse lending to consumer mortgage funding and the current impact of diminishing credit lines to fund mortgage refinance demand:
Warehouse lending, which provides short-term funding to mortgage banks so they can originate mortgages and sell them in the secondary market, is headed toward extinction.
The situation has already reached the point where many of the “once-in-a-generation” refinance and purchase opportunities touted in the media are not attainable by many consumers due to the fact that lenders face a cash crunch caused by the loss of warehouse credit lines.
This constriction is certainly slowing the pipeline of mortgage refinance applications to closings. Is it also reducing the opportunity for new homebuyers–critical to recovering still falling housing prices?
The National Mortgage News reports that warehouse lenders, numbering 90 in 2007, have dwindled to approximately 10; shrinking capacity and reducing competition. This is a natural market response to tightening credit and risk management policies as well as the desire to shrink balance sheets. However, the government continues to inject lending “stimulus” into the financial system. Unfortunately, without lending capacity this only increases the pressure building up in “the system” frustrating lenders and borrowers. The MBA quantifies the emerging problem in their Washington Times opinion piece:
The loss of warehouse lending is not only devastating to homebuyers, but also to home sellers, lenders, home builders, communities and every other entity involved in the homebuying process. Over the last two years, available warehouse funding has decreased from a capacity of $200 billion to a capacity of $20 billion to $25 billion.
Mortgage Industry Insight
What will the consequences be? Higher mortgage rates? Fannie Mae, Freddie Mac, or Ginnie Mae warehouse lending facilities? What is the fate of the non-depository mortgage lender?
Is this the bantering of a self-interested association or real cause for industry and US government concern? Comments and thoughts are encouraged…