Hi! Thanks for a very interesting question!
This question was much tougher than I thought. Due to the complexity
of the mortgage industry and the players in the food chain, it seems
that there are limited resources about warehouse lending. But I have
found some good resources that we could piece together to get a good
discussion of your requirements.
First of all let us get a general definition of ?warehouse lending? and "warehouse
line-of-credit" and then will explain them later on.
Warehouse Lending ? ?Warehouse lending is a specialized type of
lending that commercial banks and other finance institutions provide
to companies involved in the mortgage banking business. The loan that
was closed with XYZ finance company or the small community bank will
get funded with money provided by this credit facility and the
documentation will be sent to the institution that has the warehouse
lending facility to act as collateral for the line of credit.?
?Warehouse lending and Mortgage Banking?
Warehouse line-of-credit ? ?Formally entitled, a "Mortgage Loan
Repurchase Facility, a "warehouse line of credit" is supplied by a
lender to a mortgage banker from which the mortgage banker borrows in
order to fund loans it originates. The warehouse lender retains a
security interest in an originated loan until the proceeds from the
sale of the loan to the secondary market are received.?
?Glossary of Mortgage Terms and Definitions?
Another, more simplistic, definition is given here:
Warehouse line-of-credit - ?You can think of it as a credit card with
a very large limit and every time a note or piece of property is
purchased with the line of credit (credit card) the balance is taken
out of the total available credit and needs to be paid back with
Reading the definitions above we can see that ?Warehouse lending? is
the overall process of a particular company, usually a commercial
bank, lending an amount to a mortgage banker so that the latter can
cover for the mortgage loans he gives out to home buyer. The
"warehouse line of credit" is meanwhile the particular credit supplied
by the lending facility to the mortgage bank so that the latter can
In a warehouse lending process the players mainly are:
1. The Home Buyer, who applies for the loan so he/she can purchase the house.
2. ?Mortgage broker closes the loan.?
3. ?Mortgage banking company buys the loan at the time of closing.?
4. ?Bank funds Mortgage banking company using the warehousing line.? ?
This is where the "warehouse line of credit" is applied.
Please take note of No.4. This is where we find the application of the
5. ?Investor Company buys the loan as part of a pool of loans sold by
Mortgage banking company.?
6. ?Individual or corporate investor buys bonds sold by the investor
companies in the secondary market.?
?Warehouse lending and Mortgage Banking?
Now let us take into account how ?warehouse lending? affects the
participants we mentioned above. First let us take a look at the
dynamics between the borrower and the mortgage broker and/or mortgage
1. The Home Buyer:
The main concern for the home buyer or the primary customer is the
bank?s prime rate.
?The mortgage warehousing process is facilitated by the use of a line
of credit. A line approves the banker's borrowings up to a specified
maximum amount for a specified time. The rate of interest charged on
warehouse borrowings is normally floating and is tied to the warehouse
bank's prime rate. Rates can vary from the prime rate to as much as 2%
above the prime rate.?
2. Mortgage Broker and/or the Mortgage Banker
The bank you talked to (if you are the home buyer) meanwhile will sell
the loan to a bigger bank, usually a commercial bank or any credit
facility, who gave them funds using the ?warehouse-line-of-credit?.
The Commercial Bank meanwhile gets the documents from the loans. The
latter collects this and sells the pooled loans to an investment
So it goes this way:
a. Home Buyer (Applies for the loan)
b. Mortgage Banker (closes the loan and then sells it to the commercial bank)
c. Commercial Bank (Funds the Mortgage Banker) (Collects loan
documents from Mortgage bank then sells them to an Investor Company.
The mortgage broker generally operates the same way as the mortgage
banker since he also needs financing before he can fund a particular
?Warehouse lending and Mortgage Banking?
Now here are the additional dynamics between borrower, mortgage banker
and the warehouse lender.
?To the marketing manager (of the mortgage bank), the price is usually
what the investor pays to purchase loans, while to the Production
staff (the warehouse lender), the price is the interest rate and
required discount (charge) they can offer the borrower. The marketing
manager is torn between the demand for competitive mortgage programs
and pricing and the need for profit. Hence pricing is very sensitive
to market forces. When setting a price, the marketing manager
considers risk. Setting the price establishes an agreement between the
lender and the applicant to make the loan at a certain interest rate
and discount (charge in points) in a specified period. During this
time period, the mortgage banker is exposed to interest rate risk
because the market can change considerably from the rate lock to
?Isn't it surprising then, that the average home buyer does not even
try to negotiate a better rate or lower expenses with their lender??
?One of the may reasons why this does not occur often is because the
loan process is begun after the home has been contracted for and the
pressure to secure financing in a timely manner is on the home buyer,
who then seems to accept market rate, yet while the buyer is buying a
home he becomes a very active negotiator on it's price??
Interesting isn?t it? ?
Warehouse Lenders: (Commercial Banks or any credit facility)
Now let?s go to the problems of the warehouse lenders. Usually they
have to fight out the fraudulent strategies made by some mortgage
bankers or even home buyers.
?As first vice president in the warehouse lending department of China
Trust Bank USA, Eilbacher says he sees a growing amount of fraud that
requires him to be vigilant in transactions with brokers and bankers.?
?The root problem appears to be thinning originations. With volumes
off as much as 40%, warehouse lenders are fishing deeper depths for
loans and, as a result, they are drawing some undesirable catches to
?What the company watches for are unscrupulous or desperate borrowers
willing to exploit ?a perceived weakness in a lenders? processes.??
?That might include double warehousing without a single collateral
agent or diversion of retainment funds from the investor, says
Eilbacher, listing just two nefarious activities.?
?As warehouse lenders try to expand their markets, Croft suggests,
they are forced to do business with ?smaller players in the lending
food chain who are ?less well capitalized?.??
?That means exposure to ?fraud, material misrepresentation or serious
misconduct,? according to Croft, whose organization specializes in
developing and sharing information through cooperative databases
within the mortgage industry.?
?Fraud Becomes A Problem For Warehouse Lenders As Business Dwindles?
?Fraud in Warehouse Mortgage lending?
Finally let us talk about the investor companies and the individual
investors. But why talk about them if they are not part of the
warehouse lending process anymore? Actually they are very much a part
of all of this since they are the ones creating the funds for the
warehouse lender then to the mortgage banker and finally trickling
down to the home buyer.
The basic idea here is that the government encourages home ownership
and wants to improve rental housing.
?In order to do this encouraging, the government has chartered
stockholder-owned corporations and controls another one, which
together fund most of the mortgage loans in the American residential
?All three of them buy residential mortgages and then use the markets
to fund these purchases. They issue Mortgage Backed Securities and by
their sheer size and to some extent the implied or explicit backing of
the United States, they get very low funding costs making housing more
?In addition to these government sponsored institutions, large banks
also act as investors.?
?The role of investors in the mortgage business?
Search terms used:
"Warehouse Lending" "warehouse line-of-credit" mortgage bank basics
I hope these links would help you in your research. Before rating this
answer, please ask for a clarification if you have a question or if
you would need further information.
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