Things to watch out when underwriting a warehouse lending facility.
Warehouse lending can be very profitable to a commercial bank. Your lending committee will love the idea that the line is secured by very marketable securities and that the closing documentation acting as collateral will be kept in a very safe place “Your bank vault”.
However, warehouse lending is subject to some specific perils due mostly to the difference between “wet funding” and “dry funding”. These terms are related to the type of settlements that can occur at the time the real estate transaction takes place.
Wet Settlement is when the seller gets his funds right away. The closing agent is there at the time the loan is closed with a cashier check or will wire the money into the account at practically the same time that the buy/sell transaction of the real estate is happening. This is before the loan documentation is sent to the bank for its review.
Dry Settlement is when the seller has to wait until the funding institution receives the documentation and reviews it before seeing the money.
As you can see the warehouse lender loves dry settlement, and the property seller loves wet settlement.
The following are some measure that a lender can take to limit fraud on warehouse lending:
1) Strong screening process for mortgage brokers and mortgage banking companies.
2) If you are financing a mortgage banking company, make sure that they have a strong screening process of their own.
3) Fund only those loans for which you have the documentation in your bank and it has been reviewed. This might be a bit difficult to accomplish since the company will be most in need of “wet funds” financing. However, put some controls on the length of wet fund financing and the amount available under this category. Also don’t forget to price that portion accordingly.
4) Keep control of the money coming in from investors. The money should go into a separate account that only you control.