by:Mary Kladde and Ruth Lee
The rise and fall of the Dow is a fickle bellwether for the health of our local economies. As the small business arm of financial services, we can no longer wait for the macro solution. We have begun to recognize that Wall Street is in no position to initiate a “surge” in the economy. The Fed is focused on stabilizing the global economy, Wall Street and the “too big to fail” (perhaps too expensive to keep) mega banks. However, locally, the deeply devastating impact of equity loss, property tax loss, job loss, loss of consumer spending and business closure is too proximate to neglect while waiting for the Fed to figure a path out of this.
The problem is too large if we consider it macro. The answer isn’t thinking bigger, rather thinking smaller and turning to the only stable financial quarter in our economy with capital, our local banking industry comprised of community or regional banks and credit unions. Of specific importance is the housing industry, which led the meltdown to recession and is critical to any reversal.
Today, the unsung survivors of the mortgage meltdown are local banks and small business mortgage bankers. Local banks, like the remaining mortgage bankers, have stayed the course through measured growth and conservative business models. They did not benefit from the largesse of the last ten years with windfall profits, but they also didn’t expose their shareholders, depositors or members to the irresponsible losses seen elsewhere. As the front line of Main Street liquidity, local banks benefit from local economic health in a very direct and immediate way.
It is important to note that the mortgage market has changed. The only loans being originated today are of higher quality and underwriting standards than at any time in the last 15 years. Rates are at a historic low and millions of homeowners require refinancing options. However, a distinct threat to any recovery in the housing market lies in the lack of liquidity in warehouse lending for small business mortgage bankers.
Capacity was driven by the mega banks and Wall Street firms for the last ten years, and the housing crisis has left less than 10% of the capacity of just two years ago. If a lender loses their line or attempts to grow and absorb market share, they face the serious problem of having to ration their ability to service homeowners in their community. Without lending capacity, important refinances are delayed or don’t happen, and the additional disposable income available to the local is as well. Warehouse lending cannot remain a footnote to our stimulus efforts when it is the “tip of the spear” in the housing market.
Please indulge the analogy– It is like spending billions of dollars to ensure that there is an adequate supply of flu vaccine, certainly of value to public health for quality of life, productivity loss and financial reasons. However, if at the same time, we neglect the collapse of the entire syringe and vial industry– how do you get that vaccine into the patient? How do you realize the benefit of those billions spent on the vaccine? The answer… you don’t… the costs of syringes skyrocket and are rationed among those who can afford them. And just as bad, you have subverted the “public good” purpose of the funding and wasted a pile of cash.
Participating isn’t going to be a bitter pill for local banks; mortgage warehouse lending is a profitable business. Based on short term lending of 15-30 days, it is a simple business revolving line of credit with collateral attached. Demand has never been higher as Wall Street firms and mega lenders are forced to allocate resources to fund their retail and correspondent business.
Despite the obvious synergies between local banks and mortgage bankers, there are strong operational considerations to be addressed. Mortgage warehouse lending has its own requirements for compliance, due diligence and production. From collateral management to line reconciliation to technology, a local bank will have the same operational support needs as any warehouse line lender. As such, Titan has developed an operational support platform as a variable cost solution to micro warehouse lending with specific focus on the needs of local banks.
As Americans we recoil at a policy that says: if one of us has to sacrifice, I vote it is you. But we can change the policy, on a grassroots level and solve the problem ourselves. Even better, we don’t have to sacrifice our economic futures, we can make money, enhance our communities, earn a better than market return on investment. As mortgage bankers turn more and more to their local banks for warehouse lending, Titan will lead this grassroots solution to primary liquidity.
