# Understanding Warehouse Lending in Banking: How It Works and Benefits

## What Is Warehouse Lending?

Warehouse lending provides loan originators with a line of credit to fund mortgages, allowing banks to issue loans without using their own capital. Once a loan is originated, it is sold in the secondary market to repay the credit. This short-term credit system allows banks to maintain liquidity while profiting from origination fees and the sale of loans.

### Key Takeaways

*   Warehouse lending allows financial institutions to extend credit to mortgage lenders without using their own capital.  
    
*   The process supports smaller banks by providing funds to originate loans, which are quickly sold to repay the warehouse lender.  
    
*   Warehouse lending involves short-term, revolving credit lines that are repaid when loans are sold on the secondary market.  
    
*   Warehouse lenders profit by charging fees and interest for the credit lines extended to mortgage lenders.  
    
*   The 2007-2008 housing market crash significantly impacted warehouse lending, highlighting its dependency on a stable mortgage market.

## How Warehouse Lending Supports Mortgage Lenders

A warehouse line of credit is provided to mortgage lenders by financial institutions. The lenders are dependent on the eventual sale of mortgage loans to repay the financial institution and to make a profit. For this reason, the financial institution that provides the warehouse line of credit carefully monitors how each loan is progressing with the mortgage lender until it is sold.

> **Important**
>
> Warehouse lending is not mortgage lending. A warehouse line of credit allows a bank to finance a loan without using its own capital.

## The Mechanics of Warehouse Lending

Warehouse lending can most simply be understood as a means for a bank or similar institution to provide funds to a borrower without using its capital. A small or medium-sized bank might prefer to use warehouse lending and to make money from [origination](https://www.investopedia.com/terms/o/origination.asp) fees and the sale of the loan rather than earn interest and fees on a 30-year mortgage loan.

In warehouse lending, a bank handles the application and approval of a loan but obtains the funds for the loan from a warehouse lender. When the bank then sells the mortgage to another creditor in the secondary market, it receives the funds that it then uses to pay back the warehouse lender. The bank earns profits through points and origination fees.

Warehouse lending is commercial [asset-based lending](https://www.investopedia.com/terms/a/assetbasedlending.asp). Mortgage expert Barry Epstein says regulators classify warehouse loans as credit lines with a 100% risk weight. Epstein notes warehouse credit lines have short time/risk exposure compared to years for mortgage notes.

## Key Concepts in Warehouse Lending

Warehouse lending resembles [accounts receivable financing](https://www.investopedia.com/terms/a/accountsreceivablefinancing.asp) but usually involves more significant collateral. The similarity lies in the short-term nature of the loan. Mortgage lenders are granted a short-term, revolving credit line to close mortgage loans that are then sold to the secondary mortgage market.

> **Fast Fact**
>
> The housing market crash from 2007 to 2008 drastically affected warehouse lending. The mortgage market dried up as people could no longer afford to own a home. As the economy has recovered, the acquisition of mortgage loans has increased as has warehouse lending.

## Who Are the Warehouse Lenders to Small Banks?

Commercial banks and large consumer banks are typically warehouse lenders. They extend credit to smaller institutions so that they don't need to use their own capital to offer mortgage loans to borrowers. The loans are then sold, and the money is repaid.

## How Do Warehouse Lenders Make Money?

Warehouse lenders charge their clients a small fee for funding, similar to an origination fee for a mortgage. They also charge interest for the time period that the money is extended.

## What Are the Benefits of Warehouse Lenders?

Cash flow can be a problem for small banks. Borrowing from a warehouse lender allows smaller banks to do a higher volume of mortgage lending, without depleting their cash reserves. Since they quickly sell the loans after closing, it also means they don't have to service the loans for their term length.

## The Bottom Line

Warehouse lending allows smaller banks to provide mortgages without utilizing their own capital, thanks to lines of credit from larger financial institutions. These loans are then sold on the secondary market, ensuring that smaller banks remain liquid and can continue originating new loans. Warehouse lenders make money through fees and interest, while smaller banks benefit from increased cash flow and reduced risk exposure.  

> **Article Sources**
>
> 1.  ABF Journal. "[Mortgage Warehouse Lending… Clearing Up Misconceptions About This Unique Type of ABL](https://www.abfjournal.com/articles/mortgage-warehouse-lending-clearing-up-misconceptions-about-this-unique-type-of-abl/)."
>     
> 2.  Mortgage Bankers of America. "[Warehouse Lending Fact Sheet](https://www.mba.org/docs/default-source/policy/white-papers/res_pol_fs_22841_mba_warehouse_lending_brochure-pages.pdf?sfvrsn=10bd339c_1)," Page 4.