A warehouse line of credit is a credit line used by mortgage bankers. It is a revolving line of credit in which a mortgage banker arranges for a loan from a warehouse lender, then the original note from the loan is kept by the warehouse lender, while the rest of the documents go to the mortgage banker, who then offers it for sale. When an investor purchases the loan, the warehouse lender gives the original note to the investor. The purchase price is given to the warehouse lender to pay for the advances and fees. The mortgage banker keeps the remainder of the proceeds from the sale. This cycle starts over on the next loan.
The International Finance Corporation has set up warehouse lines of credit around the world and has developed a guide on how they work.
The majority of warehouse lines of credit use various types of mortgage collateral, including subprime and equity loans, residential or commercial, including specialty property types. Each individual funding is structured as a sale of loans, but the originating institution keeps all income less the agreed upon financing rate. Rates vary dependent upon collateral. Advance rates usually range higher. Servicing can be retained by the originator or sold with the loan.
Purpose
Reasons for using a warehouse line of credit include:
- Controlling funds: This system gives the mortgage banker more control over the process of drawing loan documents.
- Permanent Funding: Unless the loans fail to comply with agreed upon criteria, the lender is not obligated to buy back loans-the line of credit provides permanent funding for the life of all loans in this program.
- Less Risk: No margin calls. Once the asset is funded, there is no additional mark-to-market and posting of collateral.
- Unlimited Loan Volume: Whether on or off-balance sheet, warehouse line of credit programs can fund an unlimited loan volume. This enables specialty lenders to enlarge their portfolios for maximum interest income and eliminating the need to manage multiple sources of capital.
In addition, there are warehouse lines of credit that are non-recourse - no personal guarantees required. It can be as effective as a supplemental or primary funding source for an origination program.
Other information
Some sources state that using warehouse lines can make it easier to avoid disclosing gross income. Also, this means that in certain circumstances, the end consumer of the loan is paying more than they might otherwise, since they are paying the mortgage broker's fees as well as paying off the loan. It can also be difficult to tell if the broker is independent or an agent for the original warehouse. This is not always true, however, and usually the broker is acting as the lender in a fair and capable manner.
References
- ^ Pamphlet-WHL.qxp
- ^ Colorado Mortgage Lender's Association-http://cmla.com/mortgageterms
- ^ HUD-http:
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