Warehouse lending is in flux following a series of recent events creating a mixed outlook for mortgage originations.
For one thing, the return of policymakers' interest in making downward adjustments to the fed funds rate recently has helped with the costs associated with the short-term financing lines, which companies use to fund their originations prior to selling the loans.
(Warehouse lines typically carry adjustable rates closely tied to fed funds.)
"To take a broad-brush approach, the spread in warehouse improved to the originator," Michael McFadden, CEO of OptiFunder, noting that such conditions don't remain static as the relationship between short- and long-term rates changes with market gyrations over time.
In addition, the players involved in warehouse lending have been in flux as banks review how involvement in the space affects their capital levels. Those capital levels are subject to pending rules currently going through a
"I think that is a bigger driver of some of these bank decisions. They're looking at where higher capital charges make it more difficult to earn an appropriate return," McFadden said.
However, while the withdrawal by some warehouse lending providers has raised questions about consolidation,
(Scotiabank declined immediate comment on market conditions for this article.)
"Some players have left, but others have come in," Johnson said, noting that some mortgage lenders have been looking to diversify their warehouse line providers to address the risk.
Nondepositories in other sectors like hedge funds and insurers are showing more interest in warehouse lending assets, McFadden said.
"Nonbanks who don't have to deal with capital charges may see this as an opportunity to get in," he said.
Meanwhile,
LoanDepot securitizations, which have collateral constraints that ensure all the loans are qualified mortgages, are competitive cost-wise relative to traditional warehouse lines, he said.
"All the loans are QM, so that we can sell the entire capital structure, and that gives us essentially a 100% advance rate on the warehouse line," said DerGurahian. "It's also viewed as committed warehouse space by the rating agencies and other counterparties, which some may have requirements for or view more favorably."
It's a strategy that is not accessible to all lenders and has been limited by the industry's low volumes, but which may become more viable if monetary policymakers do continue to exert downward pressure on mortgage rates with their actions, he said.
"Historically, you would see this be anywhere from 10 to 30% of our warehouse book of business. It's been quiet the last couple of years, largely because origination volume has been down, and there hasn't been a need to issue more of these deals, but as hopefully the mortgage market here recovers a little bit and volume picks up, we would definitely consider future transactions," DerGurahian said.
