Now that mortgage refinancing is popular again, one big concern is that there won't be enough money to keep up with the demand.
Mortgage bankers say the money they borrow to finance home loans -- called warehouse lines of credit -- has dried up and that borrowers may pay the price in artificially inflated interest rates and maddening delays in loan closings.
Interest rates are at record lows. The average on a 30-year, fixed-rate mortgage fell to 4.61 percent for the week ended March 27, according to a survey released yesterday by the Mortgage Bankers Association. But many capital-starved bankers said rates could be 0.25 to 0.75 percentage points lower if they had better access to warehouse lines.
These credit lines provide bankers who are not licensed to take deposits with the money they need to close a mortgage. The bankers then pay down the credit line after the mortgage is sold to Fannie Mae, Freddie Mac or other investors.
But the amount of available credit has plummeted to about $25 billion from $200 billion a year ago, according to the mortgage bankers group. Many of the large financial institutions that extend credit to the bankers have left the business, imposed tough restrictions or capped existing lines as they try to shore up their own capital. In the past few weeks, National City Bank, J.P. Morgan Chase and Guaranty Bank have announced plans to end warehouse lending.
Mortgage bankers say the supply of money available to them is shrinking just as demand for loans is taking off, blunting the Obama administration's efforts to loosen consumer lending. Last week, loan applications were up 3 percent from the previous week and almost 69 percent compared with the previous year, the mortgage bankers' survey found.
"When demand outstrips supply, lenders manage that by raising rates" or slowing the pace of lending, said John Courson, chief executive of the mortgage bankers group. "The end result is that borrowers are not enjoying the full benefit of these lower rates."
Mahesh Swaminathan, an analyst at Credit Suisse, said he agrees that lending volume might be higher and loans might be processed more quickly if there were no credit-line problems. "But at the same time, it is not the case that activity is stalling because of that," Swaminathan said.
The new mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae totaled $172 billion in March and could reach nearly $200 billion by June, he said. That's more than the monthly high of $190 billion in 2003, suggesting that lending activity is robust, driven mostly by refinancing.
Still, some borrowers are watching their mortgage deals fall apart at the last minute. For instance, Greystone Financial's sole warehouse line was pulled in February. The Las Vegas company has shut down its operations in the District and 17 states, including Maryland and Virginia.
"We had 500 loans in the pipeline, and we had 30 loans that were signed and ready to go, but we could not fund them," said Michael Sweeney, Greystone's chief executive. "It caused a tremendous amount of headaches for the buyers, and we're not sure how much longer we can continue doing business this way."
The Warehouse Lending Project, a coalition of independent mortgage bankers, and the mortgage bankers association are working with the regulator that oversees Fannie Mae and Freddie Mac to devise a plan to bolster warehouse lending.
That regulator, the Federal Housing Finance Agency, said in a statement that it is aware of the effects of the decline in warehouse lending and that it has met with industry and administration officials to "try to develop solutions."
The warehouse-lending coalition estimates that non-depository banks supply roughly 40 percent of loans and contends that the mortgage market would suffer if they went out of business.
"Think about it: If all of a sudden there was a big demand for gasoline and 40 percent of the gas stations went out of business, you'd have chaos and disruption and higher prices. That's the situation we're drifting toward in the lending arena," said Glen Corso, a principal at the Warehouse Lending Project.