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Warehouse Lending

What is 'Warehouse Lending'

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.

Explaining 'Warehouse Lending'

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.

How It Works

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.

Asset-Based Lending

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.

Fundamentals

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.


Further Reading


Financing Competitors
papers.ssrn.com [PDF]
… Commercial Policy; Corporate Governance; Development - Economic Development; Economic Situation; Economics … General; Labor. Money and Monetary Policy; Public Finance; Real Estate … Environmental Economics. Education: Distance and Online Education; Educational Policy …

Importance of public warehouse system for financing agribusiness sectorImportance of public warehouse system for financing agribusiness sector
ageconsearch.umn.edu [PDF]
… Commercial Policy; Corporate Governance; Development - Economic Development; Economic Situation; Economics … General; Labor. Money and Monetary Policy; Public Finance; Real Estate … Environmental Economics. Education: Distance and Online Education; Educational Policy …

The role of warehouse receipt systems in enhanced commodity marketing and rural livelihoods in AfricaThe role of warehouse receipt systems in enhanced commodity marketing and rural livelihoods in Africa
www.sciencedirect.com [PDF]
… Commercial Policy; Corporate Governance; Development - Economic Development; Economic Situation; Economics … General; Labor. Money and Monetary Policy; Public Finance; Real Estate … Environmental Economics. Education: Distance and Online Education; Educational Policy …

Supply chain coordination in confirming warehouse financingSupply chain coordination in confirming warehouse financing
www.sciencedirect.com [PDF]
… Commercial Policy; Corporate Governance; Development - Economic Development; Economic Situation; Economics … General; Labor. Money and Monetary Policy; Public Finance; Real Estate … Environmental Economics. Education: Distance and Online Education; Educational Policy …

Electronic warehouse receipts registry as a step from paper to electronic warehouse receiptsElectronic warehouse receipts registry as a step from paper to electronic warehouse receipts
www.ea.bg.ac.rs [PDF]
… Commercial Policy; Corporate Governance; Development - Economic Development; Economic Situation; Economics … General; Labor. Money and Monetary Policy; Public Finance; Real Estate … Environmental Economics. Education: Distance and Online Education; Educational Policy …



Q&A About Warehouse Lending


Who uses warehouse lines of credits?

Mortgage bankers use them.

Who provides warehouse lines of credit?

Financial institutions provide warehouse lines of credit.

What is warehouse lending?

Warehouse lending is a line of credit given to a loan originator to pay for a mortgage the borrower used to purchase property.

What is a warehouse line of credit?

A warehouse line of credit is a short-term revolving credit facility extended by a financial institution to a mortgage loan originator for the funding of mortgage loans.

Why would someone use warehouse lending?

Someone might use this type of financing because they are not able to obtain funding through traditional means such as commercial loans or mortgages. They can also use this type of financing if they need more time than usual in order to sell their property or if they have an unusual situation that makes them unable to obtain traditional financing.

What is asset-based lending?

Asset-based lending is when you borrow money based on your assets instead of your income or credit history. The underlying driver of deal flow is primarily the homebuyer, who may be using cash from savings or family members rather than borrowing from banks and other financial institutions. Warehouse loans are not considered mortgages by regulators despite being secured by real estate collateral like regular mortgages, which are considered riskier investments due to higher default rates . Regulators typically treat warehousing as a line of credit with one risk weighting classification, despite its lower default rate compared with residential mortgages . This treatment allows banks and similar lenders greater flexibility in how they manage their balance sheets while still maintaining regulatory compliance .

How does the cycle start with warehouse lending?

The cycle starts with the mortgage banker taking an application from the property buyer. Then, the loan originator secures an investor (often a large institutional bank) to whom the loan will be sold, whether directly or through securitization. This decision is generally based on an institutional investor's published rates for various types of mortgage loans, while the selection of a warehouse lender for a particular loan may vary based on the types of loan products allowed by the warehouse provider or investors in that approved loan.

What are typical dwell times that loans are held on warehouses lines?

Dwell time ranges from one month to three months depending on how quickly investors review mortgages after their submission and purchase them.

What do you mean when you say "bank profits" through this process ?

Banks profit through origination fees and points paid by borrowers at closing , along with interest charged on each transaction during the life cycle of each loan .

How does warehouse lending work?

A bank handles the application and approval for a loan but obtains the funds from another lender. When it sells the mortgage, it receives money that it then uses to pay back the other lender.