Warehouse Lending Project

Warehouse lending is one of the most critical links in the housing finance chain

In 2007 an estimated 41% OF ALL home loans were funded by mortgage banking companies, and thus relied on warehouse credit to close (Source: MBA; HMDA data).  With FHA and GSE-eligible loans now dominating the market, that market share is likely higher in 2008 and 2009.

Today, although the rankings of the “largest mortgage originators” are dominated by depository institutions, most of these lenders rely on purchases of loans from “correspondent” mortgage banks.

 
Correspondent mortgage banks serve borrowers in their community using warehouse lines of credit to fund the loans at the closing table.  These loans are then sold to the larger banks and financial institutions who may then sell directly to the GSEs or into Ginnie Mae securities.

Recent Developments in Warehouse Lending

 Recent estimates indicate that
 the number of active warehouse lenders declined from a peak of more than 115 in 2005, to fewer than 30 today.
 The total aggregate capacity of warehouse lending credit has declined to about $25 billion, down nearly 90% from the level reported in 2007.

Potential Solutions

The Warehouse Lending Project is analyzing a number of policy options to this potential shortfall that threatens to hobble the housing recovery and curtail the economic recovery the U.S.

The WLP does not believe there will be a single solution to the warehouse lending shortfall. 

Policymakers need to implement a combination of solutions that provide incentives to banks currently offering warehouse lines to expand capacity, and other measures that will bring additional sources of warehouse lending capacity into the business.

The Warehouse Capacity Gap

Because of the exodus of warehouse lenders from the market and reduced availability from the remaining providers, the Warehouse Lending Project estimates that there will be as much as a $630 billion shortfall in home mortgage availability caused by a lack of warehouse lending capacity. This estimate is based upon current projections of mortgage demand in 2009 and estimated peak originations using currently available warehouse lending capacity.   

To close this gap would require an additional $32 billion in warehouse lending lines.  Given the size of the gap, the WLP is urging policymakers to consider measures that would provide incentives to boost capacity from existing providers, as well as create new sources of warehouse credit.  

Estimated Warehouse Lending Gap

1. Estimated 2009 Home Mortgage Originations    $2.1 trillion

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2. Mortgage Banker Market Share    41%

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3. Total mortgage banker originations (line 1* line 2)    $860 billion

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4. Estimated current WH lines from major lenders     $25 billion

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5. Average sustainable long-term line usage @ 70% (.7 * line 4)    $18 billion

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6. Estimated maximum funding capacity from existing warehouse lines (line 5 * 20)    $360 billion

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7. Estimated funding gap due to reduced warehouse line capacity        (line 3 - line 6)    $500 billion

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8. Adjusted funding gap (.8* line 6)†    $400 billion

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9. Estimated shortfall in warehouse lending capacity (line 7/20)†    $20 billion

† This is a baseline estimate of the additional warehouse line capacity (line 9) that would be needed to accommodate projected funding gap in 2009 (line 8).  Higher loan origination volume in 2009 and/or increased mortgage banker market share as a result of increased use of FHA loans would produce a larger gap/need.

Sources/Derivation of Estimates:

1. Most recent published estimate:  MBA forecasts $2.1T in home mortgage originations for 2009 (rev. 07-10-09).   
2.  Based on 2007 HMDA data LARs submitted by non-federally supervised lenders.  This estimate excludes from the mortgage banker market share ALL RETAIL originations reported on the Countrywide Home Loans (non-bank) LAR.
4 Estimate from industry sources.
5. This is an estimate of the average sustainable line usage over a full year.  Lenders cannot maintain a line in 100% drawdown. Line usage must accommodate peaks and troughs through monthly and seasonal funding cycles.  Based on historical experience, a 70% average would represent heavy usage over a one-year period.
6.  Assumes typical loan stays in warehouse facility for 18 days, and lines can be turned over 20 times in one year.  
8.  Assumes banks and thrifts will be able to absorb 20% of mortgage banker volume in 2009 due to warehouse line constraints.