Warehouse Bond

Definition

A warehouse bond is a financial instrument typically used in the mortgage industry. It is a short-term loan provided by financial institutions, such as banks, to mortgage companies to fund mortgages that are about to be sold to investors. The term 'warehouse' refers to the concept of these mortgages being temporarily 'stored' on the financial institution's books before being sold to investors.

Origin

The concept of warehouse bonds originated in the mid-20th century as the mortgage market expanded, necessitating a mechanism for financial institutions to provide short-term funding to mortgage companies. This tool helps mortgage companies gain the necessary liquidity before selling loans to investors.

Categories and Features

Warehouse bonds are primarily divided into two types: revolving and non-revolving. Revolving warehouse bonds allow borrowers to re-borrow after repaying part of the loan, while non-revolving warehouse bonds do not. Revolving warehouse bonds offer greater flexibility but usually come with higher interest rates. Non-revolving warehouse bonds are suitable for companies that do not need to borrow frequently.

Case Studies

Case Study 1: A large mortgage company uses revolving warehouse bonds to manage its loan portfolio. This approach allows the company to obtain short-term funding and quickly repay the debt after selling the loans. Case Study 2: A medium-sized mortgage company opts for non-revolving warehouse bonds to reduce interest costs, as its loan sale cycle is longer and does not require frequent borrowing.

Common Issues

Common issues investors face when using warehouse bonds include interest rate fluctuations and liquidity risk. To avoid these problems, it is recommended that investors carefully assess their funding needs and market conditions when choosing the type of warehouse bond.