Prior to the crackup of the housing market, most warehouse providers were ready, willing and able to extend credit to nonbank lending customers based on the value of their retained servicing rights. But then came the crash.
A handful of warehouse managers pointed to one failure in particular that froze the market: Taylor Bean & Whitaker (TBW), a large nonbank lender that went belly up in August 2009, affecting the ownership and outstanding loans backed by $65 billion of Freddie Mac and GNMA servicing rights.
Freddie Mac and Ginnie Mae seized their respective MSRs, placing them with third-party servicers, which is all well and fine, but what about any outstanding loans that are collateralized by the receivables?
Bankers, warehouse lenders included, that lent money to TBW have to wait in line with other creditors to get paid.
So when TBW hit the skids many warehouse firms pulled in their horns: no more loans backed by MSRs. But now there are signs that the market is thawing and that some warehouse banks may soon reenter the MSR lending space.
According to Tom Piercy, a managing member of Interactive Mortgage Advisors, some banks are in the sector now “but many have shied away.”
Traditionally, warehouse providers would lend up to 75% of the MSR value – but that was before housing tanked. Today, the maximum loan-to-value ratio is closer to 50%, Piercy said.
It's unclear which banks are reconsidering MSRs though the name of Associated Bank of Wisconsin came up in recent conversations among warehouse managers. (Associated didn't return a phone call on the topic.)
“Associated has talked about it,” said one East Coast warehouse chief, who requested his name not be used. This manager said his bank currently isn't lending based on MSRs, but is potentially open to the idea.
One executive for a top five ranked warehouse bank said, “Some are looking at it but I don't how many will wind up pulling the trigger.”
Officials studying the issue believe that if the market revives it will be because secondary market players such as Fannie Mae, Freddie Mac and Ginnie Mae are open to signing what's called an “acknowledgement agreement” which recognizes the warehouse lender's lien position on the MSRs.
An acknowledgement agreement essentially puts the lender in a better “waterfall position” in the bankruptcy proceeding.
GNMA has apparently signed acknowledgement agreements and Fannie Mae is open to the idea. (It's unclear where Freddie stands.)
One factor complicating such loans involves current MSR values which are in the tank. Thanks to delinquencies and sagging home values, bankers still question the worth of “legacy” MSRs, but with so many new high quality loans being written the past two years, it's only a matter of time before bankers turn on the spigot again.
Wells Fargo & Co., Bank of America, and Barclays continue to provide credit for “servicing advances” but if warehouse providers begin making loans it could help nonbanks that want to hold MSRs instead of selling them servicing released.
“Some of this is being driven by the lousy SRPs [servicing released premiums] being offered by the aggregators,” said one source. “This could help the nonbanks but I just don't know when it's going to open up.”