Warehouse Lines of Credit

warehouse line of creditWith mortgage rates still hovering near their historic lows, mortgage bankers are experiencing their highest level of business activity since before the financial crisis in 2007. The resurgence is attracting new entrants in the mortgage market hoping to capture a slice of a growing pie. However, to gain a meaningful foothold in the market, mortgage bankers must be able to offer competitive rates and, to do that, they must be able to attract a sufficient amount of deposits to fund the mortgages. In a highly competitive market that is extremely difficult to do, which is why mortgage bankers need to rely on warehouse lines of credit just to be in the game.

What is a Warehouse Line of Credit?

 A warehouse line of credit a form of asset-based lending very similar to receivables financing in which invoices are used as collateral by a lender who makes an advance to the company on those invoices. The advance is repaid when the invoice is paid by the end-customer. With a warehouse line of credit, the collateral is the loan documentation of a new mortgage loan from a mortgage banker who has committed the loan to resale or securitization in the secondary market. The lender advances a percentage of the mortgage to the mortgage banker so it can fund the loan at closing and then the advance is repaid when the mortgage is sold. The line of credit is set up as a revolving account which can be used perpetually as new mortgage loans are originated.

The premise of the transaction is sound for three reasons: 1) The mortgage banker needs capital to quickly fund the loan so it can be resold and 2) in order to receive the advance, the mortgage banker must already have investors lined up to purchase the mortgage. 3) The risk to the lender is low because it there is an investor lined up and the holding period for the mortgage is very short – typically between 10 to 20 days. Many warehouse lenders only fund 98 to 99% of the loan amount, which requires the lender to have some skin in the game.

The warehouse lender generates its profits through the fees and interest charged to the mortgage banker who earns its profits through loan origination loan and loan interest. The standard interest rate charged is based on the 30-day LIBOR plus a spread that ranges from 1.75 to 3.0%.

What Does A Warehouse Lender Actually Do?

 The warehouse lender takes a very active role in monitoring the closing of the loan and the logistical functions of delivering the loan to the investors, but the mortgage banker is responsible for executing the entire transaction, including

  • Identifying the investor who will purchase the loan
  • Underwriting the loan
  • Providing closing instructions and document preparation
  • Filing for HUD-1 review
  • Closing management, confirmation and compliance
  • Making warehouse funds request
  • Delivering the closed loan to the investor
  • Providing confirmation of loan purchase to the warehouse lender

Throughout the process, both the warehouse lender and the mortgage banker can track the flow of the transaction through an online platform provided by the lender. The lender is available for support, primarily as a facilitator for transaction. Many lenders provide technological support for facilitating the wire transfer of funds between parties. A good warehouse lender will also provide training in the use of its credit facility.

Reasons to Use a Warehouse Line of Credit

  • The line of credit enables a mortgage banker to fund loan closings without having to use its own capital
  • The transaction is usually low risk for both parties.
  • The line of credit can provide unlimited funding, enabling the originator to pursue a larger volume of loans.
  • Mortgage bankers can offer mortgages at more competitive rates.
  • Mortgage bankers are able to fund their mortgages in their own name, allowing them to build their own brand.

Establishing a Warehouse Line of Credit

 Any licensed mortgage banker can obtain a warehouse line of credit as long as it operates as a standalone entity and originates its own loans. Warehouse lenders often require a personal guarantee on the loan and most won’t move forward on a transaction without assurance there are investors line up to purchase the loan. Lenders typically have minimum net worth requirements for the mortgage bankers as well as the designated investor.

The line of credit can be established following a simple application process and the submission of a funding request that includes loan documentation and verification that an approved investor stands ready to purchase the loan. If the lender determines the loan meets its qualifications for collateral, the funding process can begin immediately.

There are around 80 warehouse lenders, some that work in areas of specialty, such as subprime, commercial, or jumbo loans. Mortgage bankers should select a warehouse lender based on the type of mortgages they originate. With so many new warehouse lenders entering the market, some don’t offer the range of loan products many mortgage originators need, which might include Harp, FHA, USDA, VA, Jumbo and Super Jumbo loans.

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