Wednesday, Oct. 7, 2009
Written 9:30 a.m.
BEST LITTLE WAREHOUSE: As long rumored, it looks like Fannie Mae and Freddie Mac are going to do even more to make mortgages available.
According to the Wall Street Journal, the home finance giants will get into the warehouse lending business. This will indirectly help consumers because there will be more money available for lending, and big banks will have some competition.
Some mortgage companies are "non-depositories" -- they're not banks that take deposits. Instead, these non-depository lenders get the money to lend by borrowing it, short term, from other financial institutions. These short-term loans are revolving credit accounts, like giant credit cards. They are called warehouse lines of credit.
Warehouse lending has dried up in the last two years. One of the biggest warehouse lenders, Colonial Bancorp of Montgomery, Ala., was raided by the FBI and later shut down by the FDIC in August. Now the major warehouse lenders are the biggest banks, such as Bank of America, which have their own vast retail mortgage lending networks.
If you think about it, you can see the conflict of interest there. Bank of America is the nation's biggest direct mortgage lender, through its branches and online. It's also one of the biggest warehouse lenders, funding its competitors. Knowing this, it shouldn't be a surprise that more than half of mortgage loans now come from just four lenders -- Bank of America, Wells Fargo, Chase and Citi. The Big Four are consolidating their grip on the industry in numerous ways, and one of those ways is by placing restrictions on their warehouse customers who are also competitors.
With mortgage lending being concentrated into just a few companies, there's a danger that lack of competition will boost rates and fees while customer service deteriorates. That's why it's probably good for consumers if Fannie and Freddie get into warehouse lending: The Big Four will have stronger competition.