Mortgage Banking
A mortgage is the transfer of an interest in property (or the equivalent in law - a charge) to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt. It is a transfer of an interest in land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest will be returned to the owner when the terms of the mortgage have been satisfied or performed. In other words, the mortgage is a security for the loan that the lender makes to the borrower.
A Mortgage bank specializes in originating and/or servicing mortgage loans.
A mortgage bank is a state-licensed banking entity that makes mortgage loans directly to consumers. The difference between a mortgage banker and a mortgage broker (a mortgage broker acts as an intermediary who sells mortgage loans on behalf of individuals or businesses) is that the mortgage banker funds loans with its own capital.
Generally, a mortgage bank originates a loan and places it on a pre-established warehouse line of credit until the loan can be sold to an investor such as Fannie Mae, or Freddie Mac. The process of selling a loan from the mortgage bank to another investor is referred to as selling the loan on the secondary market (the secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold).
Mortgage banks frequently use the secondary market to sell loans because the funds received pay down their warehouse lines of credit which enables the mortgage bank to continue to lend. A mortgage bank is not regulated as a federal or state bank and does not take deposits from consumers or businesses. A mortgage bank raises some equity which it uses to guarantee the warehouse line and the bulk of the funds are provided by the warehouse lender.
A mortgage bank can vary in size. Some mortgage banking companies are nationwide. Some may originate a large loan volume exceeding that of a nationwide commercial bank. Many mortgage banks employ specialty servicers for tasks such as repurchase and fraud discovery work.
Their two primary sources of revenue are from loan origination fees, and loan servicing fees (provided they are a loan servicer). Many Mortgage bankers are opting not to service the loans they originate. By selling them shortly after they are closed and funded, they are eligible for earning a service released premium. The secondary market investor that buys the loan will earn revenue for the servicing of the loan for each month the loan is kept by the borrower.
Unlike a federally chartered savings bank, a mortgage bank generally specializes only in making mortgage loans. They do not take deposits from customers. Their funds come primarily from the secondary wholesale market. Examples of the secondary market lenders most known are Fannie Mae, and Freddie Mac.
A company desiring to enter the mortgage business often chooses to be a mortgage banker vs. a mortgage broker primarily to earn yield spread premiums. Mortgage bankres risk their own capital to fund loans and therefore do not have to disclose the price at which they sell mortgage to another company. Mortgage brokers, on the other hand, earning the same yield spread premium disclose the additional fee to the consumer because the yield spread premium becomes an additional fee earned and therefore discloseable under federal and state law.
A mortgage bank generally operates under the different banking laws applicable to each state they do business in.
For a complete list of mortgage bankers by state, check with the state banking or financial department of each state individually. Whereas a federal bank may operate under federal law, a consumer may have additional rights under the applicable state banking law in terms of consumer protection.
Mortgage Bankers can be very competitive in mortgage lending as they specialize in only lending, and do not have to factor in subsidizing any losses in other departments such as traditional banking. At the same time they often do not have the same access to low cost adjustable rate mortgages which are typically associated with federal banks and access to federal money.
