Warehouse Lines of Credit: Drafting Financing Agreements, Custodial Agreements, Reps and Warranties

Description

Warehouse lines of credit facilitate much of the mortgage lending done in the U.S. A warehouse line of credit is a short-term revolving credit facility extended by a financial institution (usually a bank) to a mortgage loan originator (often referred to as a "mortgage banker") for the funding of mortgage loans. The typical mortgage borrower may perceive the loan originator as the lender and, from a licensing and regulatory perspective, that is entirely accurate. However, the borrower may be unaware that the loan originator may draw upon a warehouse line to fund a substantial portion of the underlying mortgage loan.

The warehouse line is documented by a loan and security agreement, master repurchase agreement, or other secured lending agreement (the financing agreement). If there is a third-party custodian, there will be a custodial agreement under which the mortgages funded on the line are deposited and held as collateral for the line of credit. Proper steps must be taken to perfect the lender's security interest in the mortgages delivered in connection with the financing agreement. The documents should also provide a procedure for the release of each mortgage loan when the loan is sold to a permanent investor and the allocable portion of the line of credit is repaid.

Counsel on both sides of the transaction need to understand the financing agreement's mortgage loan eligibility criteria. The loan originator (the seller/borrower) will agree to certain eligibility criteria and make various representations and warranties concerning the mortgage loans for the benefit of the provider of the warehouse line (the buyer/lender). If a mortgage loan fails to remain eligible or breaches a representation and warranty, the buyer/lender may be permitted to exercise certain remedies concerning such mortgage loan, including, without limitation, assigning a zero market value to that mortgage loan, making a "margin call," or causing the seller/borrower to repurchase the related mortgage loan. Eligibility criteria, mortgage loan representations and warranties, and the associated remedies are central aspects of the financing agreement and are subject to extensive negotiation.

Listen as our authoritative panel reviews the key provisions in the financing agreement. They will also discuss the delivery of the mortgage loans under the custodial agreement and the proper steps or perfection of the lender's security interest in the loans. Finally, the panel will provide an analysis of the treatment of the financing agreement as a "repurchase agreement," "securities contract," and "master netting agreement" under the Bankruptcy Code.