MBA CEO: Regulators Should Help Stabilize Warehouse Lending

The president and CEO of the Mortgage Bankers Association says that while warehouse lenders continue to adjust to the shrinking market, regulators need to consider certain changes to ensure their stability.

In a blog post published Monday titled “Regulators: Take Steps to Recognize Warehouse Lenders’ Important Role in Today’s Housing Finance Market,” Bob Broeksmit said warehouse lending “is an essential and irreplaceable form of liquidity for the mortgage market — connecting Wall Street to Main Street to provide broad mortgage credit access for borrowers across the country.”

He noted it is an especially critical source of liquidity for the independent mortgage banks (IMBs) “that provide more than 60% of mortgage origination today,” and describes warehouse lending as “a safe, attractive business, secured by high-quality, well-underwritten mortgage loans as collateral, and has shown resilience through changing market cycles.”

That has certainly been tested during the most recent cycle, which Broeksmit said has seen total origination volume cut in half from an all-time high in 2021 of $4.44 trillion to $2.25 trillion in 2022, according to MBA data. The organization expects originations to be even lower by the end of 2023. 

As a result, he states, “we have seen some necessary ‘right-sizing’ of the industry to reflect the dramatic shift in production volumes.” That has included a number of lenders deciding to merge or exit the mortgage origination business, he said, “and we are now seeing some institutions exit the mortgage warehouse lending business.”

Broeksmit, though, says it is important for policymakers to “see this for exactly what it is — market forces at work, part of a necessary and predictable recalibration in the face of declining transaction volumes and revenues.” He adds that it will likely continue “until we achieve market balance, and we shouldn’t be surprised to see similar shifts in bank business models or product lines.”

He states that there is excess capacity in the warehouse finance market because of the “precipitous drop” in origination volumes, and that is why some financial institutions have chosen to “scale back or exit” the wholesale lending market. On the other hand, he said, “the players who remain in the space should see higher usage levels and, over time, increased profitability as a result of the reduced competition.”

Broeksmit then makes the case for policymakers to take specific steps to ensure the stability of the warehouse funding market.

“Current risk-weighting requirements in bank capital rules greatly exceed the level of risk represented by warehouse lending and the underlying mortgage assets that collateralize the lines,” he wrote. “This clearly has a punitive impact on banks that choose to remain in the warehouse business, as well as a chilling effect on potential new entrants to the space.”

Watch it on The Interest: Shrinking Warehouse Lines

He adds that “larger regional banks — a critical source of liquidity for warehouse financing — could be subject to further capital charges as part of the forthcoming Basel 3 ‘endgame’ capital rules, making the problem even more severe.”

Basel III is a set of international banking regulations developed by the Basel Committee on Banking Supervision (BCBS) that seeks to strengthen the regulation, supervision, and risk management of banks worldwide. The "endgame" refers to the final implementation and adoption of Basel III regulations by all participating countries.

By implementing Basel III, regulators aim to improve the quality and quantity of capital held by banks, introduce liquidity standards, and enhance risk management practices.

“An indiscriminate increase in capital charges for mid-sized and regional banks, particularly without fine-tuning for key assets in the mortgage finance sector, could exacerbate already challenging conditions in the housing and mortgage markets,” Broeksmit states in his blog post.

He then offers two regulatory changes that should be considered:

• Reduce the risk-weighting on warehouse lending facilities to align with the risk-weighting on the underlying collateral. Under current rules, a warehouse line secured by single-family loans is assigned a 100% risk weight. If those same loans were taken on balance sheet by a bank in the event of default by a mortgage company, the risk weighting would be cut in half. “This makes no sense — for single-family mortgages that meet agency and GSE guidelines, regulators should reduce the risk weighting from 100% to 50%,” Broeksmit states. 
• The Federal Housing Finance Agency (FHFA), as the regulator of the Federal Home Loan Banks (FHLBs), should ensure that advances from the FHLB system remain available to support warehouse lenders through all market cycles. “Some FHLBs do not permit advances against warehouse line of credit, even though the collateral directly supports housing finance activities,” Broeksmit states.

He concludes: “Even in this challenging market, millions of new mortgages will be originated this year. The warehouse lending community has more than enough capacity to fulfill that demand. Regulators can help by taking steps that recognize the important role warehouse lenders play in today’s efficient housing finance market.”