Warehouse loans are similar to accounts receivable financing for industrial sectors, although collateral is generally much greater in warehousing loans. The similarity lies in the short-term nature of the loan. Mortgage lenders receive a short-term revolving line of credit to supplement mortgages, which are then sold to the secondary mortgage market. Warehouse loans can more easily be understood as a way for a bank or similar institution to provide funds to a borrower without using their capital. A small or medium-sized bank might prefer to use warehouse loans and make money from origination fees and selling the loan, rather than earn interest and fees on a 30-year mortgage. The collapse of the real estate market from 2007 to 2008 had a drastic impact on warehouse loans. The mortgage market dried up because people could no longer afford a home. As the economy recovered, so did mortgage purchases, as did warehouse loans. The warehouse finance institution accepts various types of mortgage guarantees, including subprime and equity loans, residential or commercial loans, including specialized property types.
Warehouse lenders provide the loan in most cases for a period of fifteen to sixty days. [3] Inventory credit lines are generally valued based on 1-month LIBOR plus a spread. [4] In addition, storage lenders typically apply a “discount” to line of credit advances, which means that only 98% to 99% of the nominal amount of loans is financed by them; the rest must be provided by the original lenders from their own capital. [4] After selecting an investor, the mortgage banker draws the line of credit from the warehouse to finance a mortgage and sends the loan documents to the storage credit institution to guarantee the line of credit. At this point, the storage lender perfects a collateral interest for the mortgage note to serve as collateral. When the loan is finally sold to a stable investor, the line of credit is paid through funds transferred from that permanent investor to the storage facility and the cycle begins again for the next loan. Typical maturities, which are maintained on the storage line called the period of stay, are based on the speed at which investors check mortgages for purchase after they have been deposited by mortgage banks. In practice, this length of time usually varies between 10 and 20 days. Storage facilities generally limit the length of stay a loan can have on the storage line. For loans that go beyond housing, mortgage bankers are often forced to buy these banknotes with their own money, in anticipation of a potential problem with the note. In warehouse lending, a bank takes care of applying for and approving a loan, but receives the funds for the loan from a warehouse lender. If the bank then sells the mortgage to another creditor on the secondary market, it receives the funds that it then uses to repay the storage lender.
The bank benefits from this process by earning points and original fees. Storage loans can be distinguished between “wet finance” and “dry financing”. [5] The difference is related to the time the lender receives his money compared to when the real estate transaction takes place […].
