Warehouse Lines 101: How Private Lenders Fund Loans Before They Sell Them
A warehouse line lets a lender originate more loans than its own capital would allow. It also ties the lender's cost of funds directly to bank benchmarks.
Why it matters
- Warehouse lines let lenders recycle capital quickly, so they can originate far more than their equity alone.
- Pricing is usually tied to a floating benchmark, so Fed moves change the lender's cost of funds.
- Eligibility rules and time limits mean a slow loan sale can turn into a cash call.
Explainer: background on how this part of the market works.
A warehouse line is a revolving credit facility that a lender uses to fund loans for a short period, until those loans are sold to an investor or paid off. The name comes from the idea of "warehousing" loans on the line before they move on.
For a private lender that sells its loans to note buyers or a fund, a warehouse line can multiply how many loans it can originate with the same amount of its own capital.
How it works
- The lender originates a loan. At closing, the lender funds the loan partly with money borrowed on the warehouse line and partly with its own cash.
- The loan is pledged as collateral. The loan, and the note and mortgage behind it, secure the borrowing on the line.
- The loan is sold or repaid. When the loan is sold to a note buyer or paid off by the borrower, the proceeds pay down the line.
- The line is reused. The freed-up capacity funds the next loan.
The terms that matter
Advance rate. The line typically lends a percentage of each loan's balance, and the lender funds the rest. If the advance rate is 80%, a lender funding a $500,000 loan borrows $400,000 on the line and puts in $100,000 of its own cash. The lender's portion is often called the haircut.
Pricing. Interest is usually charged at a spread over a floating benchmark, commonly SOFR or the prime rate. When the Federal Reserve raises rates, the cost of the line rises with it. The spread between what the lender earns on its loans and what it pays on the line is what makes the model work.
Eligibility. Not every loan qualifies. Lines set rules on loan type, loan-to-value, borrower experience, property type, geography and concentration. Loans that break the rules may not be financed, or may get a lower advance rate.
Dwell time. Most lines limit how long a loan can stay on the facility. If a loan sits too long, the lender may have to pay it down from its own cash. That matters if loan sales slow.
Covenants. Lenders usually must maintain minimum net worth and liquidity and stay within leverage limits. Breaking a covenant can shut off new borrowing.
Risks to watch
- Rate risk. A lender that set fixed note rates on its loans can see its margin shrink when the line's floating rate rises.
- Exit risk. If note buyers pull back, loans stay on the line longer and may hit dwell-time limits.
- Credit risk. Delinquent or defaulted loans are commonly ineligible, so the lender may need to pull them off the line and fund them itself.
Warehouse line or fund?
Some private lenders fund loans from a pooled investment fund instead of, or alongside, a warehouse line. A fund provides longer-term capital and keeps loans on the books, but it requires raising money from investors and managing that capital. Many growing lenders use both: fund capital for loans they keep, and a warehouse line for loans they plan to sell.
Sources
- This explainer describes common industry practice. Facility terms vary widely by lender, provider and loan type. For the current rate backdrop, see our analysis of the Fed's September rate hike.
