What Is Warehouse Lending?
Let me explain warehouse lending directly: it's a system where loan originators get a line of credit to fund mortgages, so banks can issue loans without dipping into their own capital. Once you originate a loan, you sell it in the secondary market to repay that credit. This setup keeps things short-term, helps banks stay liquid, and lets them profit from origination fees and loan sales.
How Warehouse Lending Supports Mortgage Lenders
You see, a warehouse line of credit comes from financial institutions to mortgage lenders, who rely on selling those loans to repay the credit and turn a profit. That's why the providing institution keeps a close eye on each loan's progress until it's sold. Remember, this isn't the same as mortgage lending itself—it's about financing the loan without using the bank's own money.
The Mechanics of Warehouse Lending
Think of warehouse lending as a straightforward way for a bank to provide funds to a borrower without touching its own capital. If you're a small or medium-sized bank, you might choose this to earn from origination fees and selling the loan, rather than holding a 30-year mortgage for interest. In practice, you handle the loan application and approval, but the funds come from the warehouse lender. Then, when you sell the mortgage in the secondary market, you use those proceeds to pay back the lender and pocket profits from points and fees.
This is essentially commercial asset-based lending. As mortgage expert Barry Epstein points out, regulators treat warehouse loans as credit lines with a 100% risk weight, but they have much shorter exposure than long-term mortgage notes.
Key Concepts in Warehouse Lending
Warehouse lending is like accounts receivable financing, but with bigger collateral involved, and both are short-term. You get a revolving credit line to close mortgage loans, which you then sell to the secondary market. Keep in mind, the 2007-2008 housing crash hit this hard—when the market dried up and people couldn't afford homes, warehouse lending suffered, but it's bounced back with economic recovery and more mortgage acquisitions.
Who Are the Warehouse Lenders to Small Banks?
Typically, commercial banks and large consumer banks act as warehouse lenders. They extend credit to smaller institutions, so those smaller ones don't have to use their own capital for mortgage loans. Once sold, the money goes back to repay the lender.
How Do Warehouse Lenders Make Money?
Warehouse lenders charge a small fee for the funding, much like an origination fee on a mortgage, plus interest for the duration the money is out.
What Are the Benefits of Warehouse Lenders?
For small banks, cash flow can be an issue, but borrowing from a warehouse lender lets you handle more mortgage volume without draining reserves. Since you sell the loans quickly after closing, you avoid servicing them long-term.
The Bottom Line
In essence, warehouse lending lets smaller banks offer mortgages without their own capital, thanks to credit lines from bigger institutions. You sell those loans on the secondary market to stay liquid and keep originating. The lenders profit from fees and interest, while you get better cash flow and less risk.
Key Takeaways
- Warehouse lending lets financial institutions extend credit to mortgage lenders without using their own capital.
- It supports smaller banks by providing funds for loan origination, with quick sales to repay the lender.
- These are short-term, revolving credit lines repaid via secondary market sales.
- Lenders profit from fees and interest on the credit lines.
- The 2007-2008 crash showed its reliance on a stable mortgage market.
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