In my very first post on this blog, I shared my "Thoughts on the Homebuilders" about 5 months ago. In particular, I was skeptical about their abilitiy to maintain swap agreements to fund their mortgage facilities, and the lingering (and value damaging) liabilites that the builders will be stuck with. Now that builders are forced to rely on warehouse credit lines for funding mortgages, they are very vulnerable to the whims of banks, who themselves are hurting for capital and not very willing to take risk. The next step in the saga is the pulling of credit lines and the sticking of bad morgtages back to the builders, which will choke them. The following is from Centex's latest 10Q:
Funding of Mortgage Loans
CTX Mortgage Company, LLC has historically funded its origination of mortgage loans through the sale of such mortgage loans to Harwood Street Funding I, LLC (“HSF-I”) and, to a lesser extent, through borrowings under more traditional committed bank warehouse credit facilities and mortgage loan sale agreements. As a result of the significant disruptions in the mortgageasset-backed commercial paper markets and , beginning in the second quarter of fiscal year 2008, HSF-I was unable to finance the purchase of mortgage loans from CTX Mortgage Company, LLC. In November 2007, HSF-I and the related swap arrangements were terminated and all outstanding obligations were redeemed. The termination of HSF-I was entirely due to these external market factors and not to any quality or performance issues related to HSF-I or its underlying collateral.
CTX Mortgage Company, LLC is currently funding its mortgage originations primarily through borrowings under a committed bank warehouse credit facility and a mortgage loan sale agreement. The warehouse facility generally allows CTX Mortgage Company, LLC to sell to the bank, on a revolving basis, mortgage loans up to an aggregate specified amount. Simultaneously, the bank has entered into an agreement to transfer such mortgage loans back to CTX Mortgage Company, LLC on a specified date or on the Company’s demand for subsequent sale by CTX Mortgage Company, LLC to third parties. Mortgage loans eligible for sale by CTX Mortgage Company, LLC under the warehouse facility are conforming loans, FHA/VA eligible loans, and jumbo loans meeting conforming underwriting guidelines except as to the size of the loan. The bank has the option to convert the facility to an amortizing loan based on the ultimate sale of the underlying collateral and not to purchase any additional mortgage loans under the warehouse facility if the Company’s long-term unsecured debt ratings fall below BB+ by Standard & Poors (“S&P”) or Fitch or below Ba1 by Moody’s Investors Service (“Moody’s”). The Company’s long-term unsecured debt is currently rated BBB- by S&P, BBB by Fitch and Ba1 by Moody’s. CTX Mortgage Company, LLC may also seek to enter into additional mortgage warehouse facilities with other lenders. Borrowings under the warehouse facility constitute short-term debt of Financial Services.
CTX Mortgage Company, LLC bears the credit risk associated with loans originated until such loans are sold to third parties. In connection with the loans it originates and sells to third parties, CTX Mortgage Company, LLC makes representations and warranties to the effect that each mortgage loan sold satisfies the criteria of the sale agreement. CTX Mortgage Company, LLC may be required to repurchase mortgage loans sold to third parties if such mortgage loans are determined to breach the representations and warranties of CTX Mortgage Company, LLC, as seller. CTX Mortgage Company, LLC records a liability for its estimated losses for these obligations and such amount is included in its loan origination reserve.