Warehouse lending is the establishment of a line of credit that allows the borrower to create a mortgage that in turn is used to purchase a piece of real estate. This loan on the line of credit normally remains in effect until the loan is bought by an investor on a secondary market, either as a direct investment or through some type of securitization situation, such as a volume purchase of a group of loans. The proceeds from the sale of this loan created using the warehouse lending strategy are used to settle the debt with the original underwriter.
In order to create a mortgage using the warehouse lending model, the borrower normally agrees to a schedule of fees that are imposed by the lender. These fees help to compensate the lender for the establishment of the line of credit, as well as the tasks necessary in helping to execute the sale of the loan at a later date. Along with fees, the borrower normally pledges some sort of collateral to the lender. The collateral in turn allows the borrower to obtain a more competitive interest rate, since the degree of risk assumed by the lender is minimized. Any assets used as collateral are freed from any obligation once the loan is sold.
Warehouse lending normally results in the creation of two loan types. One example is the dry loan. A loan that is structured in this manner requires that a thorough review of all the documents associated with the transaction is conducted before any funds are supplied. This approach makes it possible to identify and resolve any possible issues with the transaction before any money is actually extended for the purchase of the property. Doing so minimizes the chance for complications later on, and thus provides all parties concerned with a higher degree of security in the success of the transaction.
Another common approach to warehouse lending is known as the wet loan. With this type of loan situation, the funds are obtained prior to the completion and review of the documents that govern the loan process. While considered a riskier approach than a dry loan, the wet loan does have the advantage of allowing the borrower to move quickly in order to secure a piece of property. This can be extremely important if the offer of the sale is for a limited period of time only. The lender who chooses to go with a wet loan situation does take on an increased risk of either a default occurring on the loan at some future point, as well as the possibility of discovering some type of fraud once the documents are prepared and submitted for review.