Banks Fight OCC's Capital Requirements for Warehouse Mortgage Lines

American Banker, March 12, 2013 | Go to article overview

Banks Fight OCC's Capital Requirements for Warehouse Mortgage Lines


Byline: Kate Berry

When does a warehouse loan become a loan, and who owns it?

If regulators get their way in the answers to those fundamental questions, dozens of community banks would have to set aside twice as much capital as they do now for the warehouse lines of credit they extend to nonbank mortgage lenders.

The clash occurs at a critical time for small banks as big banks expand their share of the $20 billion-plus warehouse market, profits are tougher to come by and regulators and investors demand gaudier capital metrics.

"Banks want to have higher capital ratios, and one way to do it is to have lower risk-weighted assets," says Brady Gailey, a senior vice president of KBW, a unit of Stifel Financial.

The spark occurred last year, when the Office of the Comptroller of the Currency said national banks must assign a risk-weighting of 100% to warehouse mortgages. Large banks generally do so already, but community banks have typically given them a risk weighting of 40% to 50%.

Large banks treat the mortgages as collateral for funds they advance to originators, giving them the same risk weighting as commercial and industrial loans.

But small banks structure them as purchase and sale agreements or participating interests, and argue that they take legal ownership of the mortgage loans for a small period of time -- usually about 15 days -- before the loans are packaged and sold in the secondary market. Because the loans are classified as "held for sale," the banks argue, they have control over the loans and therefore should receive a lower risk-weighting.

Banks also use participating interest to avoid the risk of repurchasing a loan if it goes sour, and to maintain ownership of the loans in the event that the mortgage originator files for bankruptcy. Typically a bank will have a 99% participation interest in each of the mortgage loans, while giving the nonbank originator the remaining 1% interest.

"These loans are on my books for 15 days -- why should I tie up the capital if it's a government agency that is going to take me out?" Jerry Davis, a senior vice president for warehouse lending at ViewPoint Bank (VPFG) in Plano, Texas, says in referring to loans that are bundled into securities backed by Fannie Mae, Freddie Mac and Ginnie Mae.

But John C. Lyons, Jr., the OCC's senior deputy controller and chief national bank examiner, issued a four-page supervisory memo in December that said current practices are too risky.

"A warehouse line of credit when such mortgage loans serve as collateral does not qualify for this 50% risk weight," Lyons wrote in the memo. …

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Banks Fight OCC's Capital Requirements for Warehouse Mortgage Lines
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