Twelve months after the darkest days of the mortgage crash anyone associated with real estate lending might as well have had leprosy. At that time, liquidity dried up in secondary market, leaving the GSEs and Ginnie alone to fund the recovery; warehouse lenders and secondary market investors were hesitant about adding new customers; and investment capital was non-exist for anyone attempting to start a new mortgage operation or to expand an existing one.
Today, most surviving mortgage bankers are actually thriving. Profits are impressive, balance sheets are growing, and repurchase risk has waned. There is one issue constraining new company formation though, capital and warehouse lines.
Some banks are still dealing with bad loans, but most are flush with liquidity and looking for lending opportunities. The problem is where to make these loans and invest funds without taking on extra risks. Banks aren’t interested in making construction development and business loans. Many have parked money in lower yielding short term treasury securities while they wait for the economy to show signs of sustainable improvement. However, it’s hard to make decent spreads if your cost of funds is 0.5% and your investment yield is 0.5%.
It's time for community banks and mortgage bankers to think about partnering with one another as we saw in the 80s and 90s. Here are some of the benefits of such a partnership:
- Mortgage Banker: (a) Partnering with a bank could provide access to liquidity to fund more production; (b) national banks exempt from state licensing requirements might allow an operator to expand into other states much quicker and without some of the state regulatory oversight; and (c) the increase in production should help increase profits.
- Banks: (a) Use excess liquidity to fund the warehouse facility of a mortgage banking partner and earn the note rate until the loan is purchased by secondary market investors. A bank can earn a pretty good spread with the cost of funds being very low; (b) participate in the profits generated by mortgage banking partner; and (c) gain access to new customers.
In the last several months we’ve seen several banks and mortgage bankers create partnerships that are mutually beneficial. If you are bank, poke around in your region for profitable mortgage bankers who originate quality loans. If you are a mortgage banker, make some calls to your local community bank.
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