The Expert Podcast

There are a lot of mortgage companies shutting down because the volume of new mortgages is cratering. Very few people are getting refinances right now. When rates go up, nobody refinances because the rates are higher than what they have now, and the purchase mortgage volume is dropping like a stone. Mortgage originators need a certain volume to keep the lights on, and many of them are closing down, filing bankruptcy, or laying off staff. This has an effect on the people that work there and their vendors.

But there's also another hidden loss going on behind the scenes, and we're going to talk about this. It has to do with warehouse lenders and mortgage originators. In this case, we're talking about First Guarantee Mortgage Corporation, which is a retail provider of mortgages. So, if you apply through a mortgage broker or directly with this originator, you're a borrower doing a refinance or a new mortgage, and you're going to borrow, let's say, $400,000.

This mortgage originator approves it, underwrites it, does all the processing, and funds that $400,000 through a warehouse lender. The mortgage originator, First Guarantee, actually doesn't write the check for $400,000. What they do is get their warehouse lender, which is the actual money company, to write the check. However, as a warehouse lender, they aren't on the hook for the whole amount because there are mortgage fees, commissions, and a recourse amount. So, the originator, First Guarantee, earns some money but is supposed to pay back some of these costs to the warehouse lender.

For example, the warehouse lender writes a check for $400,000, and at the end of the month, the mortgage originator, First Guarantee, settles up with them. They say, "Okay, we'll give you $18,000 or $28,000, whatever the fees are, to offset the warehouse lender's costs." The warehouse lender makes money by funding these loans at a discount. Their profit comes from the fact that it only costs them, say, $384,000 to get back that $400,000 loan over time. The originator is supposed to settle up with them at the end of the month.

Well, when the originator goes out of business, the funding company, the warehouse lender, never gets that payment. In this case, there are tens or even hundreds of millions of dollars owed from this originator to the warehouse lenders that will never get paid. In fact, it could be worse than that. There are also some recourse agreements. If a loan that is funded doesn't meet all the underwriting stipulations, or if there's a first payment default, the originator has to buy back the whole mortgage.

For example, the funding company, the warehouse lender, writes a check for $400,000 with the contingency that they're supposed to get things like pay stubs, tax returns, or a title insurance policy. The originator represents that they have those or will get them, and they’re on the hook for recourse if they don't provide them to the warehouse lender. On the other hand, if the mortgage goes into default after the first payment (if the borrower doesn't pay), the originator often has a recourse agreement where they have to buy back the loan for $400,000. That’s in addition to the fees.

When the originator goes out of business, those warehouse lenders are stuck with hundreds of millions of dollars' worth of losses that they’re on the hook for. This is having a ripple effect in the mortgage industry because the warehouse lenders are now being more cautious. They’re not going out of pocket as much, and this caution is causing more difficulty with mortgage originations for the retailers. The originators are having a tough time with some of their markets, getting mortgages approved or funded because of other parties outside their control not paying back the warehouse lenders. In fact, in some cases, the warehouse lenders are becoming undercapitalized and can’t even fund new loans because they’re not getting the fees from the prior originators.

This is having an effect on the retail market. Unless it’s a federally guaranteed loan, which has different stipulations, these warehouse loans are disappearing. This could put more pressure on the real estate purchase market and may cause a segment of the population, who can't get a federally guaranteed loan, to have difficulty buying a house.

So, tell us what you think. What’s going on in your market? Are you seeing this having an effect? Are you a broker, and are your warehouse lenders pulling back? Are you an agent having more difficulty with contracts being funded? If you have any association with the mortgage industry, leave a comment below and let us know what information you have for future videos.