If you are in the market for a home loan, you may find it more difficult to obtain a loan through some of the smaller mortgage banks. Thanks to government support of Bank of America, J.P. Morgan Chase & Co, Wells Fargo, Citigroup and other big banks — recipients of billions of dollars in taxpayer monies — a number of smaller lenders are finding that they are being starved of credit, limiting their ability to offer loans to consumers.
In yesterday’s issue of The Wall Street Journal the newspaper interviewed Jay Brinkmann, chief economist of the Mortgage Bankers Association who noted that smaller lenders have fewer loans to offer and aren’t able to match the rates of the big banks.
Some analysts say that the rate differential is one-quarter to one-half of a percent higher for small lenders, which can add thousands of dollars to consumer mortgage costs over the life of the loan — a clear disadvantage for these types of lenders.
Moreover, most small lenders are family-owned businesses who generally borrow money for the short term from what are known as warehouse lenders. Warehouse lenders get their funding from Wall Street investment banks, but these particular institutions have cut back on warehouse loans or exited the arena altogether.
For small lenders, the drop in warehouse lenders has been precipitous, a decrease of nearly 90% since 2006. During that year $25 billion in funds came from warehouse loans.
Several large commercial banks still make warehouse loans including Bank of America through its Countrywide unit and Wells Fargo. The Mortgage Bankers Association (MBA), noting that hundreds of small lenders have gone out of business in the past few years, is asking Congress to help maintain existing sources of warehouse credit and also to create new ones.
The MBA is suggesting that Congress could provide a federal guarantee of warehouse loans, which would reduce the risk for lenders. In addition, the MBA would like to the Congress give Fannie Mae and Freddie Mac temporary authority to help provide funding for warehouse lines of credit.
What does this mean for you, the home loan shopper? Not too much other than a reduced number of lenders to select from when applying for a home loan. Big banks are still lending and, as mentioned, may be lending at a lower rate than small home lenders. But, if your credit isn’t excellent, will a large financial institution take a chance on you as might a small home loan lender?
That remains to be seen!
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