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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