Legal Definitions - mortgage warehousing

Mortgage warehousing describes the practice where a mortgage lender originates a collection of home loans and temporarily keeps them on its books. Rather than holding these loans for their full duration, the lender intends to sell them in groups to larger financial institutions or investors. This strategy enables the original lender to rapidly replenish its capital, manage its financial risks, and maintain its capacity to issue new mortgages.

• Example 1: A local mortgage company, "Community Home Loans," successfully originates 40 new residential mortgages over a two-month period. Community Home Loans doesn't have the long-term capital to service all these loans itself. Instead, it temporarily holds these 40 loans as a batch, a process known as warehousing. After two months, it sells this entire portfolio of mortgages to a large national bank, "Global Financial Corp," at a slight discount. This transaction provides Community Home Loans with immediate cash, allowing it to fund more new mortgages for local homebuyers.

  Explanation: Community Home Loans is the mortgage company that *holds* the loans temporarily (warehousing) with the explicit intention of *later resale* to Global Financial Corp, illustrating the core concept.

• Example 2: "Prime Mortgage Solutions" is a lender that specializes in originating mortgages for first-time homebuyers. To manage its liquidity and risk, Prime Mortgage Solutions has an ongoing arrangement where it accumulates all the mortgages it originates each quarter. For example, it might originate 75 new loans between January and March. During this period, these loans are "warehoused." At the end of March, Prime Mortgage Solutions bundles these 75 loans and sells them to a government-sponsored enterprise like Fannie Mae. This allows Prime Mortgage Solutions to clear its balance sheet and use the proceeds to fund the next quarter's originations.

  Explanation: Prime Mortgage Solutions *holds* a batch of loans (warehousing) for a specific period (a quarter) with the clear purpose of *reselling* them to a larger entity (Fannie Mae), demonstrating the temporary holding and resale aspect.

• Example 3: Imagine "Regional Savings Bank," which has a strategic goal to limit the total amount of mortgages it keeps on its balance sheet to a certain percentage of its assets. When the bank experiences a surge in mortgage applications and approves many new loans, it might exceed this internal limit. To stay within its policy, Regional Savings Bank will "warehouse" the excess mortgages, meaning it holds them briefly. Once a sufficient number of these excess loans accumulate, the bank sells them in a bulk transaction to an institutional investor, such as a pension fund looking for stable long-term investments.

  Explanation: Regional Savings Bank is the mortgage company that *holds* loans temporarily (warehousing) specifically for *later resale* to an institutional investor, thereby managing its balance sheet and illustrating the definition.