The warehouse credit line is the line of credit used by mortgage bankers. This is a short-term revolving credit facility extended by financial institutions to mortgage lenders for mortgage lending.
The cycle begins with a mortgage banker who takes the loan application from a property buyer. Then the lender lends an investor (often a large institutional bank) to whom the loan will be sold, either directly or through securitization. This decision is generally based on published rates of institutional investors for different types of mortgage loans, whereas the selection of warehouse lenders for a particular loan may vary based on the type of loan product allowed by the warehouse provider or the investor in a loan approved by the warehouse lender to be on the credit line.
Once an investor is selected, the mortgage banker draws the line of credit warehouse to fund the mortgage and sends the loan documentation to the warehouse credit institution to act as collateral for the line of credit. The warehouse lender, at this stage, refines the security interest in the mortgage note for collateral. When the loan is eventually sold to a permanent investor, the line of credit is paid by the funds from this permanent investor to the warehouse facility and the cycle begins again for the next loan.
The special period that loans are held in the warehouse line, called waiting time, the range based on the pace at which investors review mortgage loans for purchase after their filings by mortgage banks. In practice, this time period is generally between 10-20 days. Warehouse facilities usually limit the amount of time the loan resides can be in the warehouse line. For ongoing loans, mortgage bankers are often forced to buy this paper money with their own cash to anticipate potential problems with that record.
The International Finance Corporation has established warehouse credit lines around the world and has developed a guide on how they work.
The warehouse credit line plays an important role in making the mortgage credit market more accessible to property buyers because many mortgage bankers will not be able to attract the considerable amount of deposits required to fund a mortgage loan themselves. Therefore, warehouse financing allows loan initiators to provide mortgages at a more competitive rate. Unlike in other types of loans, loan borrowers earn more profit from origination fees than interest rate spreads because closed mortgage loans are sold quickly to investors.
Warehouse providers receive various types of mortgage collateral, including subprime and equity, housing or commercial loans, including special property types. The warehouse lender in most cases provides loans for a period of fifteen to sixty days. Store credit lines are usually sold at 1 month LIBOR plus spreads. Lenders also usually apply 'haircuts' to the credit line meaning that only 98% - 99% of the nominal amount of loans funded by them; the original lender must provide the rest of their own capital.
Video Warehouse line of credit
Destination
The reasons for using the credit warehouse include:
- Permanent Funding: Mortgage lenders do not have to withdraw deposits - lines of credit provide permanent funding for the life of all loans in the program.
- Less Risk: No margin call - after the asset is funded, no additional mark-to-market and post collateral.
- Unlimited Loan Volume: The credit line of credit programs can fund unlimited loan volume. This allows special lenders to enlarge their portfolios to earn maximum interest income and eliminate the need to manage multiple sources of capital.
In addition, in this way the warehouse credit agencies can manage the exposure to the mortgage lending market without building their own branch network.
Maps Warehouse line of credit
More information
Warehouse loans can be distinguished between 'wet funding' and 'dry financing'. The difference is related to when lenders get funding in relation to the time at which real estate transactions take place. During the 'wet financing' the mortgage lender obtains the fund at the same time as the loan is closed, ie before the loan documentation is sent to the warehouse credit provider. 'Dry financing' occurs when a warehouse credit provider obtains loan documentation for review before sending funds.
An important aspect of providing warehouse credit business is to limit fraud on warehouse loans. The main risks of fraud include the creators of dishonest mortgage loans and kolus, property companies, real estate agents and customers themselves, false information in loan applications (especially judgments), fake signatures on loan documents, and fake documents about property rights. This type of credit warehousing 'wet funding' risks in the event of a possible fraud because the credit provider will not realize the potential problem until after the funds are sent to the lender. Steps that warehouse lenders can do to limit fraud can be a powerful screening process for mortgage brokers and mortgage banking companies, ensuring the initiators themselves have a robust internal screening process, limiting the amount available for 'wet financing', and after separating the accounts for funds derived from the sale of loans to investors.
References
Source of the article : Wikipedia
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