MBA: Change Risk Weighting for Warehouse Credit

Faced with a growing dearth of funding for non-depository mortgage lenders, the Mortgage Bankers Association earlier this week sent a letter to key regulators asking for changes in risk-based capital weightings tied to various warehouse lines of credit. Calling the decrease in warehouse credit availability for lenders a “signficant, yet avoidable, bottleneck”, MBA president John Courson suggested that regulators look at easing capital requirements tied to warehouse lines of credit. Doing so, according to the MBA, would make it easier for banks to extend warehouse lines to independent, non-depository mortgage bankers; it would also remove an impetus many banks currently have for reeling in existing warehouse lines, as well. Warehouse lines provide a non-depository lender a credit facility to fund the closing of mortgages; the MBA estiamtes that warehouse credit availability declined 85 percent between 2007 and 2008, to just $20 to $25 billion. In a market expected to originate as much as $1.8 trillion in new mortgages this year — based on a recently-updated MBA forecast — Courson suggested in his letter that the reduction in warehouse credit “could extinguish” any independent lender operating solely on such credit facilities. “As a result of the fast turn of loans in warehouse (generally less than 20 days) and given the 100 percent risk weighting assigned thereto, winding down warehouse lending is a quick way for a bank to improve its capital position,” Courson argued. The MBA wants to see risk-based capital requirements on warehouse credit facilities dropped for lines backed by Fannie Mae (FNM), Freddie Mac (FRE), or Ginnie Mae eligible loans and related servicing advances. In these cases, the MBA said that requiring a 100 percent risk-based capital weighting — as is currently the case — doesn’t make much sense. In the case of so-called ‘dry funding,’ the MBA wants to see RBC requirements dropped to 50 percent, citing existing rules for whole loans held on the books. Loans ‘dry-funded’ are loans that have already been closed, but the warehouse still holds the mortgage note and collateral documents — meaning the lender is essentially one hair’s breath away from owning the loan, as the MBA described it. In the so-called ‘gestation repo’ phase — where the warehouse still holds the loan but the loan is now subject to a forward sale commitment to the GSEs — the MBA wants to see RBC rules amended to treat warehouse funds equivalent to GSE MBS, asking for a RBC ratio of “not more than 20 percent” for such loans. Read the full letter. Write to Paul Jackson at [email protected].