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Warehouse lending is a form of commercial lending that faciliates the funding of mortgage loans for a mortgage bank, bank, credit union or other mortgage lending entity. Warehouse lending is neccessary because most lenders obtain their funds from the secondary market and the time frame it may take to obtain such funding is not practical for a lender seeking to service consumers in their real estate financing transaction. A warehouse line of credit is therfore provided to a mortgage banking company to fund residential mortgages. Warehouse loans are a short term, revolving credit facility that fund a lender's pipeline at the closing table so that a lender can fund more loans than they can fund. Typically a lender cannot fund more than a few loans and if they were to fund loans, they would use up their required capital very quickly. The warehouse loan is the actual funder of the loans until the lender is able to fund the loan with a sale to the secondary market. Sometimes loans will be bundled for pricing advantages and or required commitments with a lender.
The warehouse facility serve considers the mortgages funded collateral for the line of credit. Mortgage bankers or lenders will "draw down" on the line of credit to fund mortgages or to purchase closed loans from another lender. When the mortgage banker sells the loan to a secondary market or wholesale lender / investor or into a mortgage-backed security they will pay back the warehouse lender on the warehouse line of credit.
Mortgage loans are typically repaid to the warehouse line in approximately three weeks on average. As a revolving credit facility, warehouse line of credit funds several times the line amount in mortgage loan originations.
Line amount – The maximum dollar volume of loans that can be funded. Some mortgage bankers may have multiple lines from different lenders to meet monthly funding obligations, but many have a single warehouse facility. Many warehouse lenders have been forced by market conditions to reduce their customer's line amounts.
Interest rate – Warehouse lines are generally tied to the pricing of a 1-month LIBOR (index) plus a pre determined margine to the Warehouse Lender. Index volatility and increased margin spread charges by Warehouse Lenders, have resulted in large increases in warehouse credit costs.
Advance rate – Warehouse lenders often apply a discount “haircut” to warehouse line advances, resulting in advance rates of 98% - 99% of the face amount of the loans being funded; originating lender funds the rest from its own capital. As warehouse lines have come up for renewal, some warehouse providers may increase or reduce costs such as advance rates and other penalty fees etc.
Warehouse Line Penalty Fees
A Warehouse Lender will encourage the prompt repayment of warehouse lines of credit in some instances by charging additional costs for aging loans that have gone past the typical or reasonable time to have the loans sold, and the line paid back on a mortgage loan.
Warehouse Lending Risk
Their is risk to both the mortgage banker or lender as well as the Warehouse Lender. The mortgage banker may find it diffcult to sell a loan in the secondary market, and may need to continue leaving the loan funded by the warehouse line of credit. That can be costly and might affect the bottom line and or profitiablity of the loan. If fees are added for excess aging and if the cost of a loan is not similar to what the lender gave the borrower, a lender might have to absorb a loss to fund a loan.
The risk to the Warehouse Lender is when a Lender cannot sell their loans for an exteded period of time and further if upon inspection it is revealed the loans do not conform to traditional secondary market standards. The lender might become insovent and leave the Warehouse Lender with the loans not repaid. |
