Key Takeaways
- Short-term credit lines for mortgage originators.
- Funds loans before selling to investors.
- Recycles capital for scalable loan origination.
What is Warehouse Lending?
Warehouse lending is a short-term revolving line of credit that banks or financial institutions provide to mortgage originators, enabling them to fund loans before selling them to investors on the secondary market. This facility supplies essential liquidity to independent mortgage bankers (IMBs) who lack sufficient capital to hold loans long-term.
By leveraging warehouse lines, originators can efficiently finance mortgage closings while managing their obligations to investors and lenders.
Key Characteristics
Warehouse lending features specific elements designed to support mortgage originators in their daily operations.
- Short-term credit: Typically, loans are funded for 15-60 days, allowing rapid recycling of capital.
- Advance rates: Lenders usually provide 98-99% funding of loan value, requiring a haircut to protect against risk.
- Collateralized by mortgage notes: The funded loans serve as collateral secured through instruments like a UCC-1 Statement.
- Interest costs: Pricing often involves a floating rate such as 1-month LIBOR plus a spread, reflecting risk and market conditions.
- Covenants and limits: Lines include financial covenants, credit checks, and borrowing caps to ensure lender security.
How It Works
The process begins when a mortgage originator applies for a warehouse line from a lender such as Bank of America or JPMorgan Chase. After approval, including assessment of your creditworthiness and financial ratios, you can draw funds to close loans.
Once a borrower closes, you use the line to provide funds, either through wet funding (before full documentation) or dry funding (after review). The mortgage note is pledged as collateral. Later, selling the loan to permanent investors like Fannie Mae or Freddie Mac allows repayment of the warehouse lender, replenishing your credit line for new loans.
Examples and Use Cases
Warehouse lending supports a variety of financial institutions and loan types, enabling scalability and efficient capital use.
- Large banks: Institutions such as Citigroup use warehouse lines to fund extensive mortgage origination pipelines.
- Independent mortgage bankers: IMBs rely on warehouse lending to originate conventional, FHA, and VA loans without tying up their own capital.
- Commercial loans: Some lenders extend warehouse credit to support specialty or commercial mortgage loans alongside residential ones.
Important Considerations
When utilizing warehouse lending, it’s crucial to monitor covenants closely and maintain timely loan sales to avoid breaches. Delays in selling loans can impact your liquidity and increase costs.
Understanding the cost structure, including interest rates and haircuts, helps you manage profitability. Working with established lenders like Bank of America or JPMorgan Chase often provides greater stability and competitive terms.
Final Words
Warehouse lending provides critical short-term liquidity for mortgage originators, but terms and costs vary widely. Review multiple offers carefully and run detailed cost analyses to ensure your warehouse line supports your funding needs efficiently.
Frequently Asked Questions
Warehouse lending is a short-term, revolving line of credit that banks provide to mortgage originators. It allows them to fund loans before selling those loans to investors on the secondary market.
Mortgage originators establish a warehouse line with a lender, draw funds to close loans using that line, and then sell the loans to permanent investors. The proceeds repay the lender, freeing up the line to fund new loans in a cyclical process usually lasting 15-60 days.
Warehouse lines provide liquidity, enabling originators to fund many loans without needing to hold large amounts of capital. This scalability helps independent mortgage bankers handle high volumes efficiently.
Interest on the warehouse line accrues daily and is usually based on a short-term index like 1-month LIBOR plus a spread that reflects risk. Originators pay this interest until the loan is sold and the line is repaid.
A 'haircut' means the lender funds slightly less than the loan's full value—typically 98-99%—requiring the originator to cover the remaining portion to protect the lender against risk.
Warehouse lending typically supports conventional mortgages and other loans that mortgage originators plan to sell to investors like Fannie Mae, Freddie Mac, or private buyers.
Yes, large independent mortgage bankers often maintain multiple warehouse lines from different lenders to ensure redundancy and continuous access to funding.
By enabling originators to efficiently recycle capital and fund loans quickly, warehouse lending helps reduce borrowing costs and supports a competitive mortgage market.
