Warehouse Lending: Will Your Next Mortgage Be Out of Large Box Store?

Warehouse lending is a specialized type of lending that commercial banks and other finance institutions provide to companies involved in the mortgage banking business. A loan that was closed with a finance company or the small community bank will get funded with money provided by this credit facility and the documentation will be sent to the institution that has the warehouse lending facility to act as collateral for the line of credit.

For most of you who get a mortgage through your "small town" neighborhood bank and thought your bank was doing the financing, you probably are incorrect. Your "small town"bank might provide you with good service and a competitive rate, but they are usually not interested in keeping your loan.  Small and medium sized banks make more money in the origination fees and selling your loan to an investor right away, or they might work in coordination with a mortgage banking company to sell the loan to them at the same time that your mortgage is being closed. The act of buying the loan from the originator at the same time your mortgage loan officer is closing your loan is called "table buying" or "table financing".  It works in a similar way with the mortgage brokers. Usually mortgage brokers can not afford to fund the loans themselves. A small one-man operation would be hard pressed to keep a million dollars in order to fund six closings and wait for the investor to purchase the loans. The mortgage broker needs financing in place before he can fund mortgage transaction.

The following would be a typical closing describing all of the financing players that could be involved using Warehouse Lending:

1. Mortgage broker closes the loan.
2. Mortgage banking company buys the loan at the time of closing.
3. Bank funds Mortgage banking company using the warehousing line.
4. Investor Company buys the loan as part of a pool of loans sold by Mortgage banking company.
5. Individual or corporate investor buys bonds sold by the investor companies in the secondary market.

 GSEs - Government Sponsored Enterprises

Please note that the largest mortgage investors are the government-sponsored enterprises (GSEs), not the Warehouse Lenders, which together fund most residential mortgages.  They major GSEs are:

• The Federal National Mortgage Association, known as Fannie Mae
• The Federal Home Loan Mortgage Corp., or Freddie Mac.

The GSEs buy residential mortgages and then use the markets to fund these purchases. They issue Mortgage Backed Securities and by their sheer size and to some extent the implied or explicit backing of the United States, they get very low funding costs making housing more affordable.

For further information on GSE, read What or Who Are Fannie Mae and Freddie Mac?

Alan 'AJ' Nisen, California Contra Costa Mortgage Loan Officer is a proud member of the ActiveRain Real Estate Network, a free online community to help real estate professionals grow their business.