LETTER TO THE EDITOR: Why Warehouse Lending Should Not Be Shunned

American Banker, July 15, 2009 | Go to article overview

LETTER TO THE EDITOR: Why Warehouse Lending Should Not Be Shunned


Byline: Barry Epstein

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, Chaseand 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.

lWarehouse 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.

lIf 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.

lROE just for warehouse lending is above 30% within 12 months, as the net spread is at least 3. …

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