Warehousing
Warehouse lending offers lenders short term financing so that the lender can originate new loans. Smaller banks and lenders oftentimes don’t have enough capital reserves and need short term funding to finance a new mortgage. Warehouse lending is a line of credit that an outside financial institution will give to a loan originator (a bank or lender) to help cover the cost of lending money to a homebuyer. The life of the loan usually extends from the time it is originated until it is sold back on the secondary market. Small banks and lenders will pay back their line of credit once the mortgage is sold. Lenders are dependent on the sale of the mortgage in order to pay back the line of credit and to make a profit. Mortgage warehousing allows small lenders to stay in business and provides the flexibility to finance a wide variety of loans.
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How Warehouse Lending Works
Warehouse lending allows a bank or lender to provide financing to a borrower without using its own capital. The bank will manage the application process for a new loan. Once the applicant has been approved, the bank will secure the funds to finance that loan from a warehouse lender by opening a line of credit. When the loan closes, the bank will sell the loan to a creditor on the secondary market. They will use the fees of the mortgage sale to repay their line of credit with the warehouse lender. The bank will profit from this process by charging the borrower origination points or origination fees to open the new loan.
The Real Estate Market Impacts Warehouse Lending
In a stronger market, banks have more liquid assets and might be less likely to warehouse a mortgage. This results in lower origination fees on the mortgage. When there are fewer warehousing applicants and lines of credit open, the warehouse lender will often work to become more competitive by also offering lower payback rates for the lender.
How Warehousing Affects a Homebuyer
Although warehousing happens behind the scenes, the benefits are often passed on to the homebuyer. When a lender has the backing to finance a loan, they might have more flexibility to offer down payment assistance, a lower interest rate, and other terms that are favorable to the borrower. Warehousing also allows a lender to provide financing for a larger loan. Typically mortgages that are over one million dollars will go through a warehouse lender.