A nonbank home lender has found an answer to the funding problems that have plagued such firms, one that should get it through most of the year.

Late last month Provident Funding Associates of Burlingame, Calif., quietly closed on what, on the surface, looked like a routine $300 million securitization of home loans. A close inspection of rating agency documents shows the deal will effectively function as a warehouse line for Provident.

It's been a challenging couple of years for nonbank mortgage lenders, which have struggled amid diminishing access to warehouse financing, as many of the big bank providers have cut back that business or exited the market altogether.

Many of the major warehouse lenders, which included Washington Mutual, Merrill Lynch and Bear Stearns, either failed or were sold. PNC Financial Services Group, which bought National City Corp. in 2008, has said it plans to wind down that company's warehousing business. Sources told National Mortgage News last month that PNC plans to shutter the operation by the middle of this year.

Provident's deal is significant in that it creates an alternative way for mortgage lenders to fund their operations. But it may be a viable solution for only a small number of those lenders, experts said.

Glen Corso, managing director of the Community Mortgage Banking Project, a trade group for independent mortgage bankers, said he's seen warehouse lending conditions improve some over the past year.

"It's still not plentiful or easy by any means, but it has eased up a bit," he said.

According to reports issued last week by the rating agencies Moody's Investor Service and DBRS, the maximum period that any loan can stay in Provident's Station Place Securitization Trust is 60 days, by which time Provident must repurchase the loans. The proceeds would then be reinvested in fresh loans from Provident, to be held in the trust until they, too, are resold. The cycle would repeat for the transaction's one-year term.

As the trust's name implies, it is a way station for loans eventually headed to Fannie Mae, Freddie Mac or the Ginnie Mae. All of the collateral loans are agency-eligible. In fact, one of the representations and warranties Provident made to investors is that "each mortgage loan was originated in strict compliance with agency underwriting guide[lines]," according to Moody's.

It's an interesting way to fund loans, experts said, but not necessarily practical.

"It's a funky kind of a structure," said James E. Reynolds, managing partner of Reynolds Group, a consulting firm in Summit, N.J. "Some people have described it as 'overly operational.' "
In a traditional warehouse line, "the warehouse lending borrower could actually deal directly with the warehouse lender," Reynolds said. "Here you also have to deal with other components of securitization, including a trustee. [That] seems like a fairly cumbersome practice."

Corso said most of the private mortgage banks in the U.S. are too small to attract investors to such securitization deals. Issuing "publicly traded debt or even a private placement of debt would be pretty difficult for most of the mortgage banks in this country because they are not particularly large businesses," he said.

As a further protection for investors, Provident hired Clayton Services of Shelton, Conn. to perform due diligence on "100 randomly selected loans from the closing pool," Moody's said.

Clayton checked things like credit scores, loan-to-value and debt-to-income ratios, appraisal values and compliance with federal and state regulations. Additionally, every 60 days following issuance, Clayton will randomly select 150 loans to review.

Provident (whose executives did not return calls for this story) is one of the largest private nonbank mortgage lenders in the country. It is one of the first participants in a separate pilot program launched by Freddie last October with the goal of giving lenders more access to warehouse funding.

Freddie partnered with warehouse lender NattyMac LLC, which is owned by Guggenheim Partners, to provide warehouse funding to lenders. The deal is that the credit line will fund only loans that the mortgage lender intends to sell to the government-sponsored enterprise.

"The warehouse lending industry has nearly exited the market, making it increasingly difficult for lenders to fund loans," Charles E. Haldeman, Jr., Freddie's chief executive officer, said in a press release issued at the time.

That program, too, has its skeptics. "It's an alternative solution that could benefit, at the present time, the larger mortgage bankers," Reynolds said. "There are still thousands of smaller mortgage bankers that are critical to the industry, but they aren't big enough to participate in this program." (A source at one of the companies involved in the Freddie program said it has attracted large and midsize originators of single- and multifamily mortgages, and that it continues to grow.)

Another big warehouse lender, Colonial Bank of Montgomery, Ala., failed in August. BB&T Corp., which bought most of Colonial from the Federal Deposit Insurance Corp., decided to keep and expand Colonial's warehousing business in existing markets.

In an unfortunate twist of fate, some of the pressure to get warehouse financing will be alleviated this year by an expected slowdown in business, Corso said.

There will be less demand for single-family mortgages, Corso said, because mortgage rates will rise and refinancing will be down. "So that, ironically, will help the situation," he said.

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