Homeowners waiting for the day that long-term mortgage rates drop below 5 percent again to refinance face a rude awakening.
That’s because a lack of credit lines is making it difficult for mortgage originators, locally and nationally, to get qualified borrowers the loans they want at the interest rates they want.
“Consumers need to understand that banks have tightened credit to their lending arms,” said Pete Lansing, president of Universal Lending, one of Denver’s largest independent mortgage providers.
Just as consumers borrow the money to buy a home, mortgage lenders borrow the money they bring to the closing table until the mortgage is securitized and sold off to investors.
Mortgage arms of the big banks borrow from their parents, while independent lenders rely on “warehouse” lines or short-term loans from banks.
“The choke point for all of us is warehouse lending,” said Lou Barnes, owner of Boulder West Financial Services. “It is one of dozens of aspects of a broken financial system.”
Some big players don’t have the capital they once did to lend, while others are abandoning the market entirely. JPMorgan Chase said in January that it would shut down the Washington Mutual warehouse-lending arm it recently acquired.
And as with other forms of credit, banks still in the game are tightening standards on loans once considered safe. Banks used to lend 20 or 22 times a mortgage lender’s capital, but now the ratio is in the mid-teens and headed lower, Lansing said.
Providers of warehouse lines are seeing demand spike the more mortgage rates drop. Texas Capital Bank, a top 10 provider of warehouse lines, recently e-mailed customers that it would take a week-long break from funding mortgage refi’s at the end of this month.
The bank is well-capitalized and growing, but the flood of demand risks compromising service levels, said Gary Ort, managing director of warehouse lending for the Dallas bank.
“Money is being loaned right now, but not at the level everyone would like to see it,” Ort said.
The bank still considers warehouse loans a safe product, Ort said, but also can’t get too concentrated in one line of business.
When interest rates dipped in 2003 and 2004, providers of warehouse lines stepped in and kept markets liquid despite a huge rush of activity.
This time around, mortgage markets are already strained and lack the same capacity to handle further decreases in rates.
The federal government would like to move long-term mortgage rates down to 4.5 percent as a way to free up more disposable income for consumers and to get bad loans made in recent years refinanced and off the books.
Barnes and Lansing said they await that day with some trepidation.
“If lenders don’t have the ability to lend because banks have restricted their warehouse-loan capacity, how many of those mortgages can they get done?” Lansing asked.
Given that most mortgage borrowers are at 6 percent or higher, the millions seeking to refinance could crush the system.
Like planes piling up on a snowy runway awaiting takeoff, borrowers are readying applications for when rates drop below 5 percent, Barnes said.
Independent lenders could try to raise more of their own capital, not likely in this environment, and turn over loans as quickly as possible, something they are already doing.
The government needs to loosen certain regulations and also pressure banks to lend more, Barnes said. Absent that, it needs to provide the credit itself as it has done with other markets.
So far, the new administration hasn’t addressed the topic, one crucial to any recovery.
“The immobility is difficult to explain. They understand the nature of the emergency at hand and nothing happens,” Barnes said.
