| The previous section about where
mortgage money comes from made only broad and partial references to the
many types of companies involved in distributing the money available for
mortgage loans. This section more thoroughly explains the various players in
the mortgage business and the role that each has in getting funds to the
borrower.
Mortgage Brokers
Mortgage brokers are companies or individuals that
arrange for loans with lenders such as banks, mortgage bankers,
savings and loans, and so on. A mortgage broker usually has established relationships with
a wide variety of lenders.
Mortgage brokers do not have their own money to
lend, and do not make any loans themselves. Loan underwriting (the process of reviewing a loan's
risk) and funding are conducted by the lender with whom the broker places the
loan, called the direct lender. The broker charges a fee
to the borrower, usually about 1 to 2 percent of the loan amount, for finding
the lender and processing the loan. The fee may be paid at closing of the
loan, but is often incorporated into the ultimate interest rate charged for
the loan.
Because companies that act as mortgage brokers
have access to different lenders at the same time, many consumers will find
that they'll get a lower-cost loan by getting a brokered loan. This is true
whether the loan is brokered by a mortgage broker or a mortgage banker.
Mortgage Bankers
Mortgage Banker is a term used to describe
companies that act as the proverbial "jack of all trades" in the
mortgage business. Mortgage bankers are often large organizations.
Although the word "bank" is in the
term used to describe them, mortgage bankers do not accept deposits of money
from consumers. They both make and broker mortgage loans, and
they often package loans for sale on the secondary market, especially to the big three government-chartered
mortgage buyers, the Federal National Mortgage Association (FNMA), Government
National Mortgage Association (GNMA) and Federal Home Loan Mortgage
Corporation (FHLMC). Most mortgage bankers
do not hold any of the loans they originate, although nothing prohibits them from
doing so.
Mortgage bankers also sell loans to
institutional investors like investment companies, insurance companies and
other mortgage bankers, often retaining the rights to service the loans
(collect payments). They may also service loans for "Fannie Mae,"
"Ginnie Mae" and "Freddie Mac."
Mortgage bankers make most of their money from
loan servicing fees and from fees for originating and brokering loans. Because
they typically do not hold loans, they make little money from interest
charges.
Portfolio lenders
A company that lends its own money and holds
its loans itself is called a "portfolio lender." This is because it
lends for its own investment portfolio and doesn't worry about being able to immediately sell
its loans on the secondary market.
Portfolio lenders don't have to obey the
lending guidelines of the big three government-chartered mortgage buyers because they don't plan to sell the loans they make. Thus, they can create their own rules for
measuring the risk involved with making a particular loan.
Usually, these institutions are banks or savings
and loan companies. Quite often, only a portion of their loans are held in
their portfolio, while others, which meet conventional lending guidelines, are
sold on the secondary market.
Even many loans held "in portfolio"
can eventually be sold on the secondary market. Once a borrower has made
payments on a portfolio loan for more than a certain amount of time without
any late payments, his loan becomes "seasoned." Institutions
like Fannie Mae and Freddie Mac will buy these loans even if the loans did not
originally meet their lending guidelines.
Selling these seasoned loans frees up more money for the
portfolio lender to make more loans. When a portfolio lender sells a loan, it
is usually packaged into a pool with other seasoned loans and sold to an
institutional investor. The borrower may not even realize that his portfolio
loan has been sold because some lenders retain the servicing (collection of
payments) for the portfolio loans they sell.
Direct Lenders
A portfolio lender is one example of a direct
lender: a mortgage company that lends its own money. But not all direct
lenders hold their loans in portfolio. In fact, most direct lenders package
their loans for sale on the secondary market.
A direct lender can range from the
biggest bank to the smallest credit union. Savings institutions, of course,
have deposits they can use to make loans. But many direct lenders have open
lines of credit at other institutions, which they use to fund their loans.
Correspondent Lenders
Correspondent is a term that refers to a company
that makes home loans in its own name, then sells the loans individually to a larger lender, called a sponsor. The sponsor acts as
a mortgage banker, re-selling the loans as part of a pool on the secondary
market.
A correspondent lender may fund its own loans,
or may use the funds of the sponsor. In either case, the correspondent is much
like a mortgage broker, except that it has a much stronger relationship to the
loan underwriter—the sponsor—than does a mortgage broker.
Direct lenders, such as banks, sometimes use
correspondents to make loans on property outside of states where the lender operates.
Wholesale Lenders
Most direct lenders have wholesale loan
divisions, which look to mortgage brokers for loan origination. Some direct
lenders operate entirely as wholesale lenders, without having their own retail
branches. They rely solely on mortgage brokers for finding borrowers for their loans.
These wholesale divisions offer loans to mortgage brokers at a lower cost than
retail branches offer loans to the general public. The mortgage broker then adds
a fee to the interest rate (usually in addition to the loan origination fee
charged to the borrower), resulting in a loan that costs the borrower about the
same as if the borrower had obtained the loan directly from a retail lender.
Banks and Savings & Loans
Savings and loan associations and banks may
operate as any type, or combination of types, of lenders described above. What
category a particular company falls into depends on what business model the
company follows.
Credit Unions
Because they usually have relatively few
depositors and less money compared to banks, credit unions typically operate as
correspondents. However, a large credit union, like a bank or savings and
loan, could act as any of the above lender types.
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