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Increase in number of US mortgage applications could lead to funding crisis

Mortgage bankers say that the money they borrow to finance home loans, called warehouse lines of credit, is drying up and that borrowers may pay the price in artificially inflated interest rates and maddening delays in loan closings.

Last week loan applications were up 3% from the previous week and almost 69% compared with the previous year, according to figures from the Mortgage Bankers Association.

The MBA also said that interest rates are at record lows. The average on a 30 year, fixed-rate mortgage fell to 4.61% last month. But many capital starved bankers said rates could be 0.25 to 0.75% points lower if they had better access to warehouse lines.

These credit lines provide bankers who are not licensed to take deposits with the money they need to close a mortgage. The bankers then pay down the credit line after the mortgage is sold to Fannie Mae, Freddie Mac or other investors.

But the amount of available credit has plummeted to about $25 billion from $200 billion a year ago, according to the mortgage bankers group. Many of the large financial institutions that extend credit to the bankers have left the business, imposed tough restrictions or capped existing lines as they try to shore up their own capital.

In the past few weeks, National City Bank, JP Morgan Chase Guaranty Bank have all announced plans to end warehouse lending.

Mortgage bankers say the supply of money available to them is shrinking just as demand for loans is taking off, blunting the Obama administration's efforts to loosen consumer lending.

'When demand outstrips supply, lenders manage that by raising rates or slowing the pace of lending. The end result is that borrowers are not enjoying the full benefit of these lower rates,' said John Courson, chief executive of the mortgage bankers group.

The new mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae totalled $172 billion in March and could reach nearly $200 billion by June, according to Credit Suisse. This is more than the monthly high of $190 billion in 2003, suggesting that lending activity is robust, driven mostly by refinancing.

The Warehouse Lending Project, a coalition of independent mortgage bankers, and the MBA are working with the regulator that oversees Fannie Mae and Freddie Mac to devise a plan to bolster warehouse lending.