how warehouse lending works
warehouse lending can most simply be understood as a means for a bank or similar institution to provide funds to a borrower without using its capital a small or medium sized bank might prefer to use warehouse lending and to make money from origination fees and the sale of the loan rather than earn interest and fees on a 30 year mortgage loan in warehouse lending a bank handles the application and approval of a loan but obtains the funds for the loan from a warehouse lender when the bank then sells the mortgage to another creditor in the secondary market it receives the funds that it then uses to pay back the warehouse lender the bank profits through this process by earning points and origination fees warehouse lending is commercial asset based lending according to barry epstein a mortgage lending consultant bank regulators typically treat warehouse loans as lines of credit giving them a 100 risk weighted classification epstein suggests that warehouse lines of credit are classified in this way partly because the time risk exposure is days while the time risk exposure for mortgage notes in years 1fundamentalswarehouse lending is similar to accounts receivable financing for industry sectors though the collateral is typically much more significant in the case of warehouse lending the similarity lies in the short term nature of the loan mortgage lenders are granted a short term revolving credit line to close mortgage loans that are then sold to the secondary mortgage market the housing market crash from 2007 to 2008 drastically affected warehouse lending the mortgage market dried up as people could no longer afford to own a home as the economy has recovered the acquisition of mortgage loans has increased as has warehouse lending who are the warehouse lenders to small banks commercial banks and large consumer banks are typically warehouse lenders they extend credit to smaller institutions so that they don t need to use their own capital to offer mortgage loans to borrowers the loans are then sold and the money is repaid 