Warehouse Lending
What it is:
Warehouse lending is credit provided to a mortgage lender to fund mortgages until the lender sells them in the secondary market.
How it works/Example:
Let's say John Doe goes to Bank XYZ to borrow $200,000 to buy a house. Bank XYZ gives him the loan, but it does not lend him its own money. It borrows the money from a warehouse lender. Two weeks later, when Bank XYZ sells the mortgage to another lender, it receives cash that it uses to repay the warehouse lender. Bank XYZ profits by earning points and origination fees.
Why it matters:
Warehouse lending helps banks make mortgage loans, especially small- and medium-size banks that prefer to make their money from origination fees and the sale of the loans rather than earning interest and servicing the loan for 30 years.
Often, warehouse lenders require banks to provide collateral, which is usually the bank's marketable securities and the loan documentation proving that it made the loan and will sell it.