What is a Bailee Letter and why is it necessary?

The Bailee Letter is the written documentation between the Bailor (Warehouse Lender on its own behalf or on behalf of itself and the mortgage originator) and Bailee (the secondary market mortgage investor) where the terms of the bailment arrangement are set forth for all parties. The Bailee Letters notifies the Bailee (Mortgage Investor) of the Bailor’s (Warehouse Lender’s) priority interest in a given original residential mortgage loan which is being presented to the Mortgage Investor for review and/or possible purchase. The Bailee Letter is one of the critical components used by a Warehouse Lender to protect its perfected interest in a loan for which it has provided warehouse financing. In the event that the Mortgage Investor does purchase the subject residential mortgage loan, the Bailee Letter usually also serves the Mortgage Investor with instructions on where and how to transmit the funds used to purchase the described residential mortgage loan. Also, if the Mortgage Investor purchases the subject loan, the bailment arrangement terminates when the purchase is completed.