What Is a Warehouse Line of Credit & How Does It Work?

A warehouse line of credit is a specialized financial tool that provides short-term funding within the lending industry. This credit facility enables lenders, particularly in the mortgage sector, to operate efficiently. It bridges the financial gap between a loan’s creation and its subsequent sale to investors in the broader financial market. This ensures a continuous flow of capital for loan origination.

Defining a Warehouse Line

A warehouse line of credit functions as a revolving line of credit, acting as a temporary pool of capital for loan originators. Large financial institutions, known as warehouse lenders, extend this credit to entities like independent mortgage banks. Its purpose is to provide funds for originators to close new loans, such as home mortgages, before those loans are sold to investors.

The loans originated immediately serve as collateral for the warehouse line. This security feature is key to the arrangement, as it mitigates risk for the warehouse lender. Unlike a general corporate line of credit, a warehouse line is designed for loan funding, emphasizing its short-term and highly collateralized nature. These facilities fund a high percentage of the loan’s face value, often 98% to 99%, with the originator providing the remaining portion.

The Mechanics of a Warehouse Line

The process begins when a loan originator, such as a mortgage company, needs to fund a newly approved loan. The originator draws funds from their warehouse line of credit to fund the loan amount to the borrower. Upon funding, the loan document is immediately pledged as collateral to the warehouse lender. This action perfects the warehouse lender’s security interest.

Multiple loans are accumulated on the warehouse line, creating a portfolio of collateralized assets. These loans are held for a brief period, typically 10 to 60 days, with an average “dwell time” around 15 days. During this holding period, the originator prepares to sell these loans to institutional investors in the secondary market. Major purchasers include government-sponsored enterprises like Fannie Mae or Freddie Mac, or other private investors.

Once a buyer is secured, the loans are sold, and the proceeds repay the outstanding balance on the warehouse line. This repayment is usually settled with the warehouse lender directly. As funds are repaid, the credit capacity on the warehouse line is replenished, illustrating its revolving nature. This allows the loan originator to access funds again for new loan originations, maintaining continuous lending operations.

Role and Significance in Lending

Warehouse lines of credit provide short-term liquidity, allowing loan originators to fund loans without holding large amounts of their own capital. This financial structure enables lenders to maintain a consistent loan origination volume. The ability to quickly access funds ensures lenders can respond promptly to market demand and close loans efficiently.

These lines are important within the mortgage industry, where independent mortgage banks rely on them to facilitate homeownership. By using a warehouse line, lenders avoid tying up their balance sheet capital in individual loans, which are intended for quick sale to the secondary market. This also helps manage interest rate risk, as loans are held for a short duration before being sold, reducing exposure to market fluctuations. The availability of this financing benefits both loan originators and borrowers by ensuring a steady supply of credit.