This topic is mainly applicable to loan originators, including private lending firms and mortgage brokers who want to become a lender. If you’re a real estate investor, you probably won’t find this information to be useful, unless you’re planning to start a private lending company.
For loan originators who operate with a business model of funding loans and selling to the secondary market, bank warehouse lines are typically the ultimate capital source because they are the cheapest cost of capital available. If you’re charging borrowers an average of 9% interest for your short-term loans, and your warehouse line interest rate is 4%, that’s a huge profit to be made.
The challenge for most lenders is being able to qualify for these warehouse lines. You typically need to pledge an existing portfolio of loans worth several million dollars in order to get the line. Another downside to warehouse lines is the risk of the line being pulled if there is a major economic event. While the likelihood of this happening is very slim, if it does happen, it could kill your entire lending business.
Many local community banks offer warehouse lines, but they typically restrict the geographical areas where you can lend. For example, a community bank in Texas typically won’t accept notes in which the collateral is located outside of Texas. Or a bank based in New York may not accept collateral outside of the Northeast. So you can’t use community bank warehouse lines to lend nationally, and the line amount you’d get from smaller local banks may not be enough to support your growth.
If you are unable to get a bank warehouse line to capitalize your private lending business, there are 2 alternatives you might consider.
Explore Other Capital Structures
If you’ve given up on the idea of getting a warehouse line, but you want to be a portfolio lender, the primary alternative capital structure most lenders use is a mortgage fund. Although it takes years to build up, a portfolio mortgage fund offers more control and stability. But the two alternatives we want to cover are not for portfolio lending. They serve the business model of funding loans and selling to the secondary market.
Alternative #1 – Pre-Takeout Warehouse Line
The first alternative is what we call a “Pre-Takeout Warehouse Line”. This is a very unique product offered by only a few companies in our industry. These capital providers have relationships with multiple institutional loan buyers, also known as aggregators.
So long as the loan you’re originating will be sold to one of those approved institutional loan buyers, the capital provider will allocate a certain amount of money to you based on your average loan volume. At closing, they will fund 80 to 90 percent of the loan amount, and you contribute the difference. The cost for this short-term capital will likely be in the range of 50 to 100 basis points, and the key to this program is the loan must be sold to the institutional loan buyer within 15 days.
Alternative #2 – Liquid Mortgage Fund
The second alternative to bank warehouse lines is a “Liquid Mortgage Fund.” So you’d form a mortgage fund just for the purpose of funding loans that will be sold to the secondary market. The fund won’t hold any loans for more than 30 days.
The key selling point to potential fund investors is no lockup period or long-term commitment would be enforced. Because you’d be cycling the funds once or twice a month, you can allow the fund investors to pull out with a 30-day notice, and that low commitment could make it easier to raise capital.
When compared to the pre-takeout warehouse line alternative, the main benefit of the Liquid Mortgage Fund is you’re not limited to a small number of institutional loan buyers. You can sell loans to other types of capital providers such as insurance companies, family offices, and even individual note investors. They likely won’t be as efficient as the institutional aggregators, but at least you’d have more control and flexibility.
Resources for Lenders
Many private lending firms use multiple capital structures. It’s possible you may have a bank warehouse line, manage a fund, sell loans to institutional aggregators, get some loans table funded by individuals, and also use a wholesale partner for unique loans that are outside of your wheelhouse. It’s a good idea to explore all of your options, and you can use our website as a resource to find capital providers and law firms that specialize in setting up mortgage funds.
- Visit the Services Provider Directory
- For the Pre-Takeout product, select Capital
- Browse the main list, or filter by category
- To find attorneys that can help you create a new mortgage fund, click Legal on the main Services page
- Select the Fund Advisory category from the filters section
- Click on each company’s profile to learn about their program, then click the green contact button to find their phone number, an email form, and a link to their website.
The companies listed pay us a monthly advertising fee, so there is no cost to make contact through our website.