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.

BREAKING DOWN '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 Warehouse Lending 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 of 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.

The housing market crash from 2007 to 2008 drastically affected the warehouse lending process. With many individuals losing their homes or experiencing a severe drop or cut-off of income, the mortgage loan market all but dried up. As the economy continues to recover, the acquisition of mortgage loans continues to increase, as does warehouse lending.

RELATED TERMS
  1. Warehouse Bond

    A type of financial protection that assures an individual or ...
  2. Secondary Mortgage Market

    A secondary mortgage market is a market where mortgage loans ...
  3. Loan Officer

    A loan officer is a representative of a bank, credit union or ...
  4. Data Warehousing

    Data warehousing is the electronic storage of a large amount ...
  5. Fallout Risk

    The lending risk that occurs when the terms of a loan are confirmed ...
  6. First Mortgage

    A first mortgage is the primary lien on the property that secures ...
Related Articles
  1. Personal Finance

    How Do Mortgage Lenders Get Paid and Make Money?

    When homebuyers educate themselves on how mortgage lenders get paid and make money, they are more likely to save thousands of dollars on their mortgages.
  2. Personal Finance

    Mortgage Company

    A company engaged in the business of originating and/or funding mortgages for residential or commercial property.
  3. Personal Finance

    How Fintech Can Disrupt the $14T Mortgage Market

    Fintech firms have started to enter the $14 trillion mortgage market in creative ways.
  4. Personal Finance

    How to Find the Best Refinance Companies

    From traditional lenders to online loans, here's everything you need to know about refinancing your mortgage.
  5. Investing

    Who is Ruling the Jumbo Mortgage Market?

    The jumbo mortgage market appears to be booming this year, despite the few economic hurdles everyone's battling. Here's who is ruling the industry.
  6. Personal Finance

    Reduce Interest With An All-In-One Mortgage

    "Offset" mortgages combine a checking account, home-equity loan and mortgage into one account.
  7. Personal Finance

    Behind the scenes of your mortgage

    Four major players slice and dice your mortgage in the secondary market
  8. Investing

    Securities Lending: Cause Of The Next Financial Crisis?

    Securities lending can pose risks to investor's portfolios and the entire financial system.
  9. Insights

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
RELATED FAQS
  1. If My Mortgage Lender Goes Bankrupt, Do I Still Have to Pay My Mortgage?

    Yes, if your mortgage lender goes bankrupt you do still need to pay your mortgage obligation. Here's what usually happens ... Read Answer >>
  2. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ... Read Answer >>
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center