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Warehouse lines of credit are real estate secured short-term lines of credit that allow mortgage bankers to fund loans into the secondary market until the loans are purchased by the end institutional investors.

According to US Department of Commerce, Bureau of the Census, current home ownership rates as of the second quarter of 2007 are 68.2%. This is expected to increase in the next few years due to demographics. In particular, the aging baby boom generation is entering its peak earnings period. Increases in home ownership rates will result in increases in mortgage loan originations.

The regulatory marketplace is making it increasingly difficult for the traditional mortgage broker to remain in business. Regulators continue to pass legislation and place constraints on the broker in relation to the fees that are collected versus the service that is being provided. The regulatory bodies have interpreted the role of a mortgage banker as being one that is at risk to the market because a loan is closed in the banker's name utilizing a warehouse line. This is causing the more established brokers to seek a warehouse line facility and is the fastest growing segment of the mortgage banking customer base.

The two most common issues that make it difficult for the broker to obtain warehousing through traditional sources is that (i) brokers do not maintain the minimum net worth requirement of large warehouse lenders, (ii) brokers do not want to use a line that requires them to sell exclusively to a certain investor. These brokers need the training, assistance and follow through that we have been providing for years. Bank lending institutions familiar with mortgage lending discovered an opportunity to provide quality originators with credit facility secured by the underlying mortgage with rates of returns that were attractive to the banks.

As stated earlier, the traditional method of funding these loans is the use of a mortgage warehouse line. The funding source, (the "Warehouse Lender or Bank"), generally offers the necessary funds through a revolving purchase agreement to a mortgage banking company for funding mortgages at closing. All of the loans are pre-sold in the secondary market to large institutional investors, many of which are New York Stock Exchange listed companies. The warehouse line funding covers approximately a 15 to 30 day period between loan closing and the sale of the loans to the end institutional investor.

Interest is paid on each transaction on the number of days the warehouse lender holds the mortgage loan, from the original funding date to the date the funds are received from the mortgage purchaser. The rate charged is either Wall Street Prime or Libor plus a negotiated margin as well as a per transaction fee to cover administrative and other related expenses including the wire fee, overnight deliveries, and the custodial fee.

Many recent changes concerning RESPA's disclosure of service release premiums coupled with the additional earning power of brokers has caused a great demand for warehouse lines. It is extremely difficult to grow a business with limited warehousing capabilities, and many smaller mortgage firms have expanded and ultimately need these warehouse lines to enhance their mortgage activities.