Warehouse Mortgage Lending: Pros and Cons

When the average person hears the term “warehouse mortgage lending,” he or she is likely to think it is a mortgage loan on a warehouse building.  Warehouse mortgage lending actually refers to a specialized line of credit that certain larger banks and institutional lenders provide to mortgage bankers.


A mortgage lender that wants to open up a storefront and start making mortgage loans to borrowers needs cash. A line of credit provides that needed cash. The mortgage banker provides a mortgage loan to a borrower, drawing money off of the line of credit to help fund the loan, and providing the mortgage note to the “warehouse lender” as collateral to secure the line of credit. Within a short period of time, the note is sold to the warehouse lender or an investor (often through a securitization) and the line is paid back down. The mortgage banker earns the bulk of its money from the origination fees charged when the loan is made.


Funding can either be as “dry funding” or “wet funding.” Dry funding refers to mortgage loans where the mortgage lender supplies the documentation from the real estate loan closing to its warehouse lender/investor who reviews the documentation for completeness before accepting transfer of the loan.  Wet funding refers to mortgage loans where the closing of the real estate loan and the fund from the warehouse lender/investor occur at essentially the same time.


The Good


The warehouse lender is able to earn fees and/or expand its loan portfolio without the overhead expense of a larger staff and branch office locations. The mortgage lender has access to the cash it needs to keep making an unlimited volume of loans.  The arrangement in general expands the universe of mortgage lending options for borrowers.


The Bad


A warehouse lender runs the risk that the mortgage originator fails to maintain appropriate credit standards and adequately screen its borrowers, therefore making a lot of bad loans that end up on the warehouse lender’s books.


The Ugly


This arrangement can lead to fraud, particularly if a mortgage lender is dishonest or is in collusion with a local title agency, appraiser, real estate agent or even the borrower. Paperwork can be falsified and the fraud isn’t always obvious.  Wet funding of mortgage loans is more susceptible to fraud so a warehouse lender needs to carefully screen the originator to minimize its risk.


While the potential upside of providing warehouse lending makes such lines of credit worth a closer look, a warehouse lender needs to act prudently to minimize its exposure to the  potential fraud and other risks inherent in such arrangements.


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