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April 24, 2020  

Banks See Payday in Mortgage Warehouses

In an answer to the home-loan industry’s recent tumult, several banks are offering mortgage-warehouse facilities in which the underlying accounts aren’t marked to market.

Sources identified J.P. Morgan and Morgan Stanley as being among a growing group of institutions pitching the credit lines to their clients. While such financing has always been available to some extent, lenders rarely advertised it as an option.

Instead, banks typically have preferred to follow a more standard format in which they routinely update the values of any warehoused assets — and thus have wide latitude to issue margin calls when the facilities are insufficiently collateralized. But that approach can leave borrowers exposed to liquidity squeezes during market downturns, as occurred when the coronavirus crisis upended the financial world in March.

So why would banks take on the market exposures that come with warehouse lines that aren’t marked to market? For facilities that finance reperforming mortgages or loans that fall outside the Consumer Financial Protection Bureau’s “qualified-mortgage” standards, they currently can charge interest equal to 300-500 bp over one-month Libor while offering financing equal to 65-75% of the portfolios’ face values.

That compares to 100-200 bp over Libor and an advance rate of 90-95% for warehouse lines that are marked to market. “Banks never miss a beat when taking advantage of a situation,” a source said.

The banks are also betting that the loans will perform well enough to keep the credit lines profitable. “Non-mark-to-market warehouses are suddenly in vogue. Never thought I’d see the day,” one issuer said.

Among the companies that have taken out such warehouse lines is Cerberus Capital, which borrowed an undetermined amount of money from J.P. Morgan to finance a pool of reperforming loans that its FirstKey Mortgage unit plans to securitize. As liquidity in that market dried up, sources said Cerberus had temporarily turned to other forms of private financing. “They needed new financing in order to line up future deals,” one source said.

FirstKey last completed a reperforming-mortgage securitization on March 24, selling $1.2 billion of bonds with J.P. Morgan running the books. Since entering the market in 2015, it has completed 36 deals totaling $41.2 billion in the asset class.

The sudden appearance of warehouse facilities that aren’t marked to market comes just weeks after REITs including AG Mortgage Investment, Invesco Mortgage Capital and MFA Financial were hit with margin calls they couldn’t meet. Those moves in some cases reflected steep declines in the values of non-qualified loans. Such accounts are trading today at an average of 85 cents on the dollar, down from 104 cents before the crisis took shape.