Warehouse lending, the quiet yet powerful force that drives the mortgage origination market, is doing better than it has in years.
Only six years since nearly being wiped out of existence, warehouse lenders are now bustling, with more players steadily joining their ranks.
It’s hard to imagine that there were only 20 warehouse lenders in business six years ago. Today, there are close to 80.
But now, the warehouse lending segment is dealing with a new set of challenges that, while not as dire as a market collapse, could threaten their future — or quiet possibly open up new opportunities.
Scorching Competition
Traditionally, warehouse lending provided excellent margins to those with the capital, expertise and tools to get involved. Yet only a year ago, warehouse lines were significantly underutilized by mortgage bankers because origination volumes were so low.
That’s no longer an issue — utilization rates are back up to 50 to 60 percent due to the recovering market and the emergence of independent mortgage bankers, who are some of the biggest users of warehouse funds.
Warehouse volumes have been steadily curving upward since one year ago, with a decrease in refinance volume being replaced by an increase in purchase volume.
However, the increase in overall origination volume is placing significant downward pressure on pricing.
As a result, the competition among warehouse lenders is increasingly fierce.
Large warehouse lenders, who compete on volume, are seeing fees squeezed the most. Small to medium sized warehouse lenders, on the other hand, are typically niche lenders, so their fees are not being affected as much.
But their margins are thinning as well.
The TRID Impact
The broker-to-banker conversions that began after the housing crisis is increasing in velocity, thanks to the TILA-RESPA Integrated Disclosure Rule.
With the new disclosure rules, brokers have to lock in their lender immediately after the application process, which means they have less flexibility to shop for loans on behalf of their customers.
Converting to a banker solves that issue. And while not all brokers are capable of becoming bankers, those that are qualified are seeking warehouse partners.
TRID and the growth of non-QM lending is also driving increased concern from bankers over compliance issues. As a result, warehouse lenders need to make sure they have the correct policies and procedures in place — not only on the front side as they work with mortgage originators, but on the investor side as well.
It’s not just TRID that warehouse lenders are concerned about.
Other issues, such as marketing-service-agreement and affiliated-business arrangements are becoming important issues, with the Consumer Financial Protection Bureau now drilling down and levying significant fines against even very small mortgage bankers for non-compliance.
In a sense, the CFPB has created paranoia that has mortgage bankers looking for ways to shave costs. Warehouse lending is generally one of the first places they look to cut, which is placing additional downward pressure on prices.
Entering a Digital Age
There are even more compliance challenges ahead.
Next year we will see significant expansion of Home Mortgage Disclosure Act requirements, for example.
But while these factors may continue to drive down margins and drive up costs, there are also some positives behind them.
Truly the only way to improve cost efficiency and increasing data integrity is through electronic regulatory compliance.
At some point, it’s inevitable that all compliance reviews will by default have to be done electronically. With the increased number of data points and process points that have to be proven, that’s the only way to effectively evaluate large numbers of loans for quality or achieve compliance reviews.
The good news is that these technologies will also save originators and warehouse lenders enormous sums of time and money.
Meanwhile, a growing number of players are already embracing digital origination and delivery solutions.
The warehouse lending segment is deeply involved with this effort.
Earlier this year, the the Mortgage Bankers Association created an eWarehouse work group to collectively identify and create standards and practices in the management of e-notes. Once finished, these standards promise to increase efficiency tremendously.
The bottom line is that the warehouse lending segment is healthier than it has been in years.
While it’s true that warehouse lenders are not catching many breaks, by embracing digital transactions and closings, they can play an important role in a more efficient and safer industry.
