Banks Tighten Credit Terms on Mortgage Companies

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By MARC HOCHSTEIN In the latest aftershock from the collapse of the subprime mortgage business, bank lending to the mortgage industry is getting tight.

Warehouse lenders-banks that supply interim financing while mortgage banks wait to sell home loans in the secondary market-are reexamining their portfolios, raising prices, and requiring stricter terms and more disclosure, experts say.

Though the banks are most concerned about subprime lenders, they are also clamping down on loans to traditional mortgage companies. If the trend persists, it could place small independent mortgage banks at a serious competitive advantage in home loan originations.

"Nondepository mortgage banks need warehousing to operate," said Michael McMahon, an analyst at Sandler O'Neill & Partners and a former warehouse lender. "Without it, you're out of business."

The pullback began last year, when subprime lenders were thrown into turmoil by volatile capital markets and rising prepayments on home loans. That led warehouse lenders to reassess their ties to subprime lenders, bankers say. And the tightening has since extended well beyond the subprime sector.

"Numerous banks are taking credit losses in an industry where they're not expected to take credit losses," said Robert Salcetti, managing director of corporate mortgage finance at Chase Bank of Texas, a unit of Chase Manhattan Corp. "As a result, you may see some banks exit lending" to mortgage bankers.

Accubanc Mortgage, a Dallas company that lends mainly to A-quality borrowers, is one mainstream lender already feeling the pinch. Over the last six months some of its lending banks have reduced their exposure to the company, said William R. Starkey, chief executive officer.

"When these warehouse lenders start getting in trouble in one area, they'll start tightening credits, and everyone's going to pay for it," Mr. Starkey said. He added that his company's lines were hurt by the merger of BankAmerica Corp. and NationsBank Corp. Both banks had lent to Accubanc in the past, but the merged company reduced its exposure.

Banks had $37.2 billion in warehouse lending commitments at the end of August, the last period for which data is available, according to National Mortgage News. The lines are usually secured by mortgages held for sale.

Such arrangements are often the lifeblood of small mortgage companies that don't have deposits to fund their loans or high enough credit ratings to borrow on an unsecured basis.

Bankers say the full extent of the crunch will not become clear until credit lines come due over the next few months. …