The head of a housing finance trade group is calling for policymakers to protect funding that nondepository financial institutions rely on following a banking crisis that some have feared could lead to tighter credit.
Responding to plans to rewrite capital rules for banks following the crisis, Mortgage Bankers Association President and CEO Bob Broeksmit emphasized the need to avoid imposing unduly restrictive risk weighting on warehouse lending, which so far, has been bearing up following failures of Silicon Valley Bank and Signature Bank in March.
“An indiscriminate increase in capital charges for mid-sized and regional banks, particularly without fine-tuning for key assets in the mortgage finance sector, could exacerbate already challenging conditions,” Broeksmit said in a blog published Monday.
Rather, Broeksmit suggested that rulemakers consider providing more leeway by bringing the risk weighting for lines of credit that fund single-family loans, which is now at 100%, more in line with that assigned to the mortgage collateralizing the funding (50%).
He called the current risk weighting a deterrent to banks offering warehouse lines and a challenge to new entrants at a time when some providers such as Comerica have been exiting the business.
Comerica spoke well of the business line’s health, but said it was at odds with its deposit risk, a concern highlighted by the banking crisis.
Mortgage lenders don’t necessarily need to worry about warehouse lending consolidation in general because it, like mortgage financing, naturally undergoes some rightsizing when volumes fall as they have, Broeksmit noted
Consolidation among warehouse banks “is a natural response to declining demand … that should reverse,” said Broeksmit, who suggested that the business should have a backstop to weather any risk that occurs in the interim.
“The regulator of the Federal Home Loan Banks should ensure that advances from the FHLB system remain available to support warehouse lenders through all market cycles,” he said. “Some FHLBs do not permit advances against warehouse [lines] of credit, even though the collateral directly supports housing finance activities.”
Warehouse lending plays a key role in the housing market and should receive support because nonbanks are the source of the majority or 60% of all mortgage originations in the United States, Broeksmit said.
Whether policymakers generally expected to be more likely to increase risk weightings in the wake of the banking crisis or lighten them to make allowances for warehouse lending remains to be seen.
If risk weighting remains status quo for housing finance assets but capital rules overall tighten, securitizations could become more attractive, said Walt Schmidt, senior vice president, mortgage strategies, FHN Financial.
Mortgage-backed securities with direct government ties have a 0% risk weight. MBS from the government-sponsored enterprises have a 20% risk weight. Those risk weights are relatively low because government or quasi-public entities guarantee investor payments.
(While the fact that prices for some older MBS were underwater after a rate rise contributed to banking crisis concerns after depositor runs on troubled institutions, that concern is different than the possibility of nonpayment credit-risk weightings reflect.)
“They’re not without risk but all things being equal, if you’ve got a decision between making a loan and buying an MBS, the bonds are more attractive in terms of liquidity and risk weight,” Schmidt said in an interview.
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