Warehouse Loans: How Do They Work?

A warehouse loan is a line of credit that financial institutions extend to smaller banks or mortgage loan originators to fund mortgage loans. Warehouse lending allows banks to provide loans without using their own capital. The term warehouse financing comes from the fact that mortgage loans are held for several weeks in a figurative warehouse before being sold on the secondary market. Warehouse lines of credit are typically short-term, lasting one year or less, as the loans they fund are quickly sold to permanent investors to repay the warehouse lender.

Warehouse lending vs mortgage lending

Warehouse lending is a line of credit given to a loan originator or mortgage lender. The funds are used to pay for a mortgage that a borrower uses to purchase property. The life of the loan generally extends from its origination to the time it is sold on 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. Warehouse lending is a way for a bank to provide loans without using its own capital.

Mortgage lending, on the other hand, is a type of loan used to purchase real estate. The funds from a mortgage loan are used to pay for a property, and the property is then used as collateral for the loan. The borrower makes regular payments to the lender, which include both the principal amount of the loan and interest. The interest rate on a mortgage loan can be fixed or variable, depending on the terms of the loan.

One key difference between warehouse lending and mortgage lending is that warehouse lending is a short-term, revolving credit line, while mortgage lending is typically a long-term loan with a fixed or variable interest rate. Warehouse lending is also a way for banks to provide loans without using their own capital, while mortgage lending involves the bank lending its own funds to the borrower.

Another difference between the two types of lending is the repayment structure. With warehouse lending, the repayment of the loan is ensured through charges on each transaction and collateral, while with mortgage lending, the borrower makes regular payments over a set period of time until the loan is paid off.

Additionally, warehouse lending is often used by smaller banks or financial institutions to offer mortgage loans to borrowers without having to use their own capital. This allows them to increase their lending volume and grow their business. Mortgage lending, on the other hand, is typically offered by larger financial institutions that have the capital to fund the loans.

The role of banks

Secondly, banks handle the application and approval process for the loans. They carefully monitor the progress of each loan until it is sold on the secondary market. The bank then sells the mortgage to another creditor in this secondary market and uses the funds received to repay the warehouse lender. By doing so, the bank can profit by earning points and origination fees without putting their own capital at risk.

Additionally, banks play a crucial role in managing the exposure to the mortgage loan market. They can provide warehouse lines of credit without having to build their own branch network, thus expanding their reach. Banks also differentiate between 'wet funding' and 'dry funding'. 'Wet funding' occurs when the mortgage loan provider receives the funds simultaneously as the loan is closed, before the loan documentation is sent to the warehouse credit provider. On the other hand, 'dry funding' takes place when the warehouse credit provider receives the loan documentation for review before disbursing the funds.

Furthermore, banks are responsible for ensuring the security and integrity of the lending process. This includes fraud detection and deterrence, addressing risks such as collusion between parties and falsified information in loan applications. The bank also takes on the role of managing the collateral for the loan, which can include various types of mortgage collateral, such as subprime and equity loans, residential or commercial properties, and specialty property types.

Warehouse funding

Warehouse lending is differentiated between 'wet funding' and 'dry funding'. 'Wet funding' occurs when the mortgage loan provider gets the funds at the same time as the loan is closed, i.e. before the loan documentation is sent to the warehouse credit provider. 'Dry funding' takes place when the warehouse credit provider gets the loan documentation for review before sending the funds.

The benefits of warehouse funding include permanent funding, less risk, and leverage. It provides permanent funding for the life of all loans in the program, and there are generally no margin calls or additional collateral required after the asset is funded. It also provides leverage, allowing mortgage bankers to originate and sell more mortgages than their capital would otherwise allow.

Wet funding and dry funding

Warehouse lending is a line of credit given to a loan originator, which is then used to pay for a mortgage that a borrower uses to purchase property. The loan is then sold on the secondary market, and the money is repaid. Warehouse lending is a way for a bank to provide loans without using its own capital.

During wet funding, the mortgage loan provider gets the funds at the same time as the loan is closed, i.e. before the loan documentation is sent to the warehouse credit provider. Wet funding is riskier in terms of possible fraud because the credit provider will not be aware of potential problems until after the funds are sent to the loan closing agent. Wet loans are not legal in all states, so it is important to check state laws before considering this as a mortgage option.

Dry funding takes place when the warehouse credit provider gets the loan documentation for review before sending the funds. Dry funding provides an added layer of consumer protection and helps to ensure the legality of the transaction. Dry loans provide more insurance that the transaction will be completed without problems and with less risk of fraud or mistakes.

Warehouse financing

The cycle starts with the mortgage banker taking a loan application from the property buyer. The loan originator then secures an investor (usually a large institutional bank) to whom the loan will be sold, either directly or through securitization. The mortgage banker then draws on the warehouse line of credit to fund the mortgage and sends the loan documentation to the warehouse credit provider. The warehouse lender perfects a security interest in the mortgage note to serve as collateral. When the loan is sold to a permanent investor, the line of credit is paid off by wired funds, and the cycle starts again for the next loan.

Warehouse lending is a way for banks to provide loans without using their own capital. The bank handles the application and approval of the loan but obtains the funds from a warehouse lender. When the bank sells the mortgage to another creditor in the secondary market, it uses the funds to pay back the warehouse lender, profiting through points and origination fees.

Reasons for using a warehouse line of credit include permanent funding, less risk, and leverage. Warehouse lending can be differentiated between 'wet funding' and 'dry funding'. 'Wet funding' occurs when the mortgage loan provider gets the funds at the same time as the loan is closed, before the loan documentation is sent to the warehouse credit provider. 'Dry funding' takes place when the warehouse credit provider gets the loan documentation for review before sending the funds.

Frequently asked questions