INVESTMENT BANKS are offering mortgage banks a new type of financing that is encroaching on turf traditionally held by commercial lenders.
"Wet gestation repos," as Wall Street has dubbed the new instrument, are repurchase agreements that allow mortgage banks to borrow against mortgages pending sale into the secondary market from the moment the loans are in the hands of the mortgage bank - in other words, while the ink on the mortgage bank - in other words,
Pioneered earlier this year by Donaldson, Lufkin & Jenrette Securities Corp. and now offered by PaineWebber Inc., wet gestation repos are the latest example of investment banks replicating the functions of mortgage warehouse lending.
"The investment banks are certainly moving earlier in the food chain," said A. Donald Pray, head of mortgage lending at Bank of New York.
Until recently, mortgage banks that wished to borrow against mortgages immediately after the loans closed could do so only through mortgage warehouse lines, typically provided by a syndicate of commercial banks. Generally, mortgage warehouse lines allow for a sublimit of such borrowings, usually between 10% and 35% of the entire facility.
Breaking Free of Limits
However, this year's furious pace of originations caused some mortgage banks to bump heads against these sublimits.
It was into this vacuum that investment banks stepped. "We wanted to provide the funding our clients needed," said Rod Enrico, senior vice president at Donaldson, Lufkin & Jenrette.
From a mortgage banker's perspective, wet gestation repos almost always carry lower coupons than the equivalent mortgage warehouse lines. …