Warehouse Lending

Warehouse lending is a short-term financing arrangement that lets mortgage originators fund loans without using their own capital. A warehouse lender (typically a larger bank or financial institution) provides a revolving line of credit that the originator draws on to close mortgage loans. Once a loan is sold into the secondary market, the originator repays the warehouse line.

Key takeaways

• Warehouse lines are short-term, revolving, asset-based credit facilities used to fund mortgage origination.
• Originators repay the line when they sell loans on the secondary market.
• Warehouse lenders earn fees and interest; originators earn origination fees and profit on loan sales.
• The model depends on a functioning secondary market; disruptions (e.g., 2007–2008) can impair warehouse lending.

How warehouse lending supports mortgage originators

Warehouse lines let smaller banks and independent mortgage lenders maintain liquidity and scale loan production without tying up capital for the life of long-term mortgages. This enables higher origination volume and quicker turnover because loans are closed, sold, and proceeds used to repay the credit facility.

Mechanics

• A warehouse lender extends a revolving credit line secured by the mortgage loans (or other eligible collateral) that a lender originates.
• The originator draws funds from the line to close loans.
• The originator typically sells the closed loans to investors or into the secondary market (for example, to government-sponsored enterprises or private investors).
• Sale proceeds are used to pay down the warehouse line, restoring capacity for new loans.
• Warehouse lenders monitor loan pipelines and impose eligibility and documentation standards to manage risk.

Key concepts

• Short-term, revolving credit: Lines are intended to be repaid when loans are sold rather than held for decades.
• Asset-based lending: The loans themselves serve as collateral, so warehouse lending is a form of commercial asset-based financing.
• Accounts-receivable analogy: Warehouse financing functions similarly to financing receivables but typically with larger, mortgage-backed collateral.
• Regulatory treatment: Warehouse credit lines are generally treated as credit facilities with significant risk weighting; exposure is short in duration compared with mortgage notes held long term.

Who provides warehouse lines?

Commercial banks and large consumer banks commonly act as warehouse lenders, extending liquidity to smaller banks, mortgage bankers, and nonbank originators that need funding to close loans.

How warehouse lenders make money

• Origination/commitment fees for providing and maintaining the credit line.
• Interest on outstanding balances while loans remain on the line.
• Spread management between funding costs and rates charged to originators.

Benefits and risks

Benefits:
* Improved cash flow and scalability for originators.
Reduced need to hold long-term credit risk and servicing obligations.
Faster capital turnover and ability to originate more loans.

Risks:
* Dependency on a functioning secondary market — if investors stop buying loans, originators may be unable to sell and thus unable to repay the warehouse line.
Credit and operational risk if loans are ineligible, improperly underwritten, or defective.
Market and liquidity risk for warehouse lenders if many loans cannot be sold promptly.

Historical note

The 2007–2008 housing market disruption sharply reduced demand in the mortgage secondary market, demonstrating how fragile warehouse lending can be when loan purchasers withdraw. As markets recovered, warehouse activity resumed alongside renewed investor appetite.

Bottom line

Warehouse lending is a critical short-term financing tool in mortgage markets. It enables originators to fund and sell loans quickly, preserving liquidity and supporting higher origination volumes. The model works well when secondary markets are active but carries concentrated liquidity and market risks if loan purchasers retreat.