Warehouse lending is a line of credit given to a loan originator to pay for a mortgage the borrower used to purchase property. The life of the loan generally extends from its origination to the time it is sold into the secondary market, either directly or through securitization. The repayment of warehouse lines of credit is ensured by lenders through charges on each transaction in addition to charges when loan originators post collateral.
A warehouse line of credit is provided to mortgage lenders by financial institutions. The lenders are dependent on the eventual sale of mortgage loans to repay the financial institution and to make a profit. For this reason, the financial institution that provides the warehouse line of credit carefully monitors how each loan is progressing with the mortgage lender until it is sold.
Warehouse lending can most simply be understood as a means for a bank or similar institution to provide funds to a borrower without using its own capital. In warehouse lending, a bank handles the application and approval for a loan but obtains the funds to make the loan from a warehouse lender. When the bank then sells the mortgage to another creditor in the secondary market, it receives the funds that it then uses to pay back the warehouse lender. Jane Doe’s bank profits through this process by earning points and origination fees.
Warehouse lending is asset-based lending of the commercial type. The underlying driver of the deal flow is primarily the homebuyer. Warehouse lending is not mortgage lending. Bank regulators typically treat warehouse loans as lines of credit and label them with a 100% risk-weighted classification, despite the fact the collateral, when held as a mortgage note, is considered to be less risky by the same regulators. How warehouse lines of credit are classified may be due, in part, to the fact the time/risk exposure is days, while time/risk exposure for mortgage notes is years.
In a number of ways, warehouse lending is strikingly similar to accounts receivable financing for industry sectors, such as distributors and manufacturers. The exception is the collateral on such lending, which is typically significantly stronger. Mortgage lenders are granted a short-term, revolving credit line to close mortgage loans that are then sold to the secondary mortgage market.