As community banks continue to struggle with finding new sources of revenue, a few have latched on to a business that was historically the domain of big banks — mortgage warehouse lending.
Community bankers provide four reasons why the business is an attractive field: relatively low risk, growth potential, a familiarity with the subject matter and revenue diversification.
"The opportunity to grow it is very dramatic. We could probably go up 40%-50%" next year, said John C. Millman, the president of the $2.66 billion-asset Sterling Bancorp. "We're extremely enthusiastic about it."
Community banks like the business of providing warehouse lines to nonbank mortgage lenders because tight underwriting standards have lowered the risk of loan default. The business is also seen as a natural fit with past experience in residential real-estate lending, several bankers said.
"Community banks are really pretty familiar with residential lending, so it's not a huge leap for them to go over to warehouse lines," said Paul Best, who leads the warehouse lending unit at the $25.3 billion-asset People's United Financial Inc. of Bridgeport, Conn.
People's United had about $475 million in warehouse commitments as of September, up from $100 million a year earlier, and some warehousing firms have doubled their commitment requests, according to National Mortgage News, a sister publication.
In the past 18 months, several community banks have launched business units for mortgage warehouse lending, bankers and industry consultants said. They range from the $3.1-billion asset Republic Bancorp Inc. in Louisville, Ky., to the $317.2 million-asset Fidelity Holding Co. in Edina, Minn. Plenty more could enter the business in coming months, said Larry Charbonneau, a mortgage industry consultant.
"It's something that definitely is helping the growing of fee revenues during a time when the spread component" is challenging," said Damon DelMonte, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc.. "This is just another way to branch out."
Sterling, based in New York, has already grown its Sterling National Mortgage warehouse-lending subsidiary. Sterling's loans to non-depository institutions, which primarily consist of mortgage warehouse lending, grew to 9.3% of the company's total loans at June 30, John Tietjen, Sterling's chief financial officer, said during an Oct. 20 conference call. That was up from 2.9% at the end of 2009, the year Sterling entered the market. Banks are not required to break out exact figures for warehouse lending in regulatory filings.
New lending guidelines dictated by Fannie Mae and Freddie Mac have lowered default risk, Charbonneau said. Warehouse lending also helps banks diversify, while also producing both fee income and interest income.
"Community banks feel that it's a safe space to lend in, with what I would call the elimination of the exotic products that were out there," said Neal Krumper, an executive vice president at Sterling Bancorp and head of the company's warehouse unit.
"Almost all the loans being put on the warehouse lines are sold to Fannie Mae, Freddie Mac or [U.S. Housing and Urban Development] with the guidelines being more conservative," Krumper said. "Bankers feel the risk is much more limited because the product is more generic or vanilla than it has been."
Mortgage warehouse lending had been dominated by the likes of Bank of America Corp. in Charlotte, N.C.; Wells Fargo & Co. in San Francisco; and New York's Citigroup Inc. and JPMorgan Chase & Co.
Regional banks are also players, including BB&T Corp. in Winston-Salem, N.C.; Comerica Inc. in Dallas; and First Horizon National Corp. in Memphis, Tenn.
Bank of America is widely expected to exit the business soon, and the company has been ranked as the top warehouse lender as measured by outstanding loans, according to National Mortgage News. That's would create enough of an open seam for banks like Sterling to pull the trigger, industry observers said.
"We have noted that many banks had exited the mortgage warehouse business, and that usually presents an opportunity," Millman said.
To be sure, warehouse lending carries risks. As a result, community banks should tread carefully, and should bring in people with expertise in auditing loan pipelines, said Brian Olasov, a managing director at McKenna Long & Aldridge LLP.
"Fannie and Freddie have gotten keener and faster on mortgage reviews to press repurchase claims," Olasov said.
