Origination News Feature Story

Funders Avoiding Startups

By Bonnie Sinnock

CHICAGO--Startups and those attempting broker-to-banker transitions may find it particularly challenging to obtain essential warehouse financing in today’s tough market, when even those with established lines have been hit hard by some large providers’ recent decisions to drop out of the business, executives participating in a panel discussion at the Mortgage Bankers Association’s National Secondary Market Conference told attendees here last month.

Given the refinancing boom, some lenders have been trying to convince executives to give them lines by telling them that they could use the funding to "really grow," said Ken Logan, director, residential mortgage and consumer group, Wachovia Securities. "I don't want to hear that right now," Mr. Logan said. "The refi boom is eventually going to end. What’s going to happen to them at that point?" Mr. Logan’s business is now owned by Wells Fargo and represents one of the few large institutions that has committed itself to the warehouse lending game at a time when some other notable players have dropped out. "The decision has been made to keep us in the business," he said.

Warehouse lenders, several of which were burned in the recent so-called subprime crisis, are gun-shy and in short supply today, in part, because risk weighting for the financing is a hurdle for banks providing it. Nevertheless, there are reasons the business may be considered attractive such as the huge underserved demand for the financing that has been amplified by the Federal Reserve policy-driven refinance boom, and some institutions like ViewPoint Bank have entered the game relatively recently.

But Jerry Davis, senior vice president, warehouse lending for ViewPoint, told attendees he has to be "pretty selective" because several companies are in precarious financial condition and may not even realize it, making them very risky propositions for any warehouse lender that might fund them.

Although warehouse lenders have been inundated with requests, the executives said that it is possible to "get your name on the list" for funding today. The panelists said mortgage bankers most likely to continue receiving warehouse funding are those that have strong pre-existing balance sheets and business relationships. Those seeking warehouse funding should not be counting on a turnaround going forward as far as profitability, Mr. Logan said. "The corner has got to have been turned," he said. In addition, those who are "just a broker with a line" are unlikely to be considered strong candidates for warehouse financing today, he said.

As far as "good companies" that might be threatened by the loss of lines from companies exiting the business, Mr. Logan said his company is "trying to save those that we can to the extent that we can."

Mr. Logan said those with established relationships with Wachovia and Wells are more likely to be prioritized.