Mortgage warehouse lending is short-term financing that a mortgage lender uses to fund a closed home loan while it waits to sell or deliver that loan to an investor. The warehouse line bridges the gap between paying for a borrower’s closing and receiving the proceeds from the loan sale. The borrower on the warehouse line is generally the mortgage lender—not the homebuyer.
What is a mortgage warehouse line of credit?
It is a revolving credit facility for a mortgage originator. The originator draws funds to finance closed mortgages, holds those loans temporarily, and repays the draws when it sells or delivers the loans through a secondary-market channel. The facility is secured by mortgage-loan collateral, subject to the facility’s terms.
This is business financing, not another loan the homebuyer takes out. The homebuyer owes the mortgage debt under the mortgage documents; the originator owes repayment of its warehouse advance under its credit agreement. Federal Reserve Regulation Z recognizes that a creditor may fund a dwelling-secured transaction at consummation by drawing on a bona fide warehouse line of credit. See Regulation Z, 12 CFR § 1026.36.
How does warehouse lending work?
- The originator closes the borrower’s mortgage. It needs funds to complete the transaction.
- The originator draws on its warehouse line. It uses the advance to fund the closing and holds the closed loan in its warehouse inventory.
- The originator sells or delivers the loan. The buyer may be an investor or an eligible secondary-market channel.
- Sale proceeds repay the advance. The warehouse lender’s lien or interest in the loan collateral must be released so the purchaser can acquire the note without that warehouse lien. Fannie Mae describes its whole-loan purchasing policies in its General Information on Whole Loan Purchasing Policies.
The warehouse stage connects mortgage closing to the later sale or delivery of the loan. The OCC describes mortgage banking as involving originations and the purchase and sale of loans through the secondary mortgage market. OCC: Mortgage Banking / Residential Lending.
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Why do mortgage lenders use warehouse financing?
A lender often has to fund a mortgage before it receives the cash from selling that mortgage. A warehouse line supplies interim liquidity so the originator can close loans without waiting for each loan’s sale proceeds before funding another transaction. It is a link in the mortgage lender’s funding and delivery process, rather than a source of permanent financing for the homebuyer.
The OCC’s Comptroller’s Handbook: Mortgage Banking calls management of risk in the pipeline and warehouse a key component of a successful mortgage banking operation.
What risks can affect a warehouse line?
Collateral helps secure a warehouse advance, but it does not remove the lender’s need to sell or deliver loans and repay advances as expected. Federal Reserve research on warehouse funding identifies several ways a facility can come under pressure. Federal Reserve: Vulnerabilities of Warehouse Funding.
- Loans take longer to sell: Aging loans may trigger added charges or margin requirements, increasing the originator’s funding burden.
- Collateral values fall: Mark-to-market devaluations may require the originator to provide additional collateral or otherwise meet funding requirements.
- The facility expires or is not renewed: If a line reaches maturity without renewal, the originator may need another source of funding to repay outstanding advances.
- Covenants are breached or the lender changes its appetite: A breach can lead to cancellation, and a warehouse lender may reduce available funding as its assessment of risk changes.
- Interest rates move: Rate changes can affect both rate-locked mortgage commitments in the pipeline and loans already held in warehouse inventory. The OCC notes that inadequate hedging can expose mortgage banking operations to market losses.
What should a mortgage lender examine in a warehouse facility?
Terms are specific to each facility; the sources do not establish a single standard set of market terms. When evaluating a line, a lender can examine the provisions that determine cost, collateral eligibility, funding availability, and how a loan is released for sale:
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- Pricing, fees, and advance or haircut terms
- Eligible collateral and collateral valuation procedures
- Loan-aging limits and related charges or margin requirements
- Covenants and the consequences of a breach
- Collateral control and lien-release mechanics
- Maturity, renewal provisions, and operational requirements
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