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Back in the good ole days, acquiring a loan for a potential piece of property, simply required walking to the neighborhood bank or savings & loans company. It the bank had “extra funds” lying around and considered you a good credit risk, they would generally go ahead and lend you the money from their own funds.
Today, mortgage lending is a major and specialized category of the business of finance in the United States of America. Consider this, in 2003 total U.S. residential mortgage production reached a record level of $3.8 trillion. In the United States, most of the money for home loans comes from three major institutions:
- Fannie Mae (FNMA - Federal National Mortgage Association)
- Freddie Mac (FHLMC – Federal Home Loan Mortgage Corporation)
- Ginnie Mae (GNMA – Government National Mortgage Association).
The objectives of these institution is to foster mortgage lending, and thus to encourage home ownership and construction. The money generated by these institutions then goes towards many lenders who “service”
By now, you probably understand that a mortgage is a type of loan that assists in making a real estate purchase affordable over a long term period. The source of where one would procure such a loan is given the generic name of “lender”. But who exactly is the lender? What kinds of institutions are we actually borrowing from? Are all lenders the same?
A Mortgage Banker is a lender that is large enough to originate loans and create pools of loans that they sell directly to major mortgage lending institutions (i.e. Fannie Mae, Freddie Mac, Ginnie Mae). Any company that does this is considered to be a mortgage banker. Mortgage bankers can vary greatly in size. Some may service the loans they originate, but not all of them will. Most true mortgage bankers have wholesale lending divisions. The two largest mortgage bankers in the United States are Countrywide Home Loans and Wells Fargo Mortgage. One is associated with a bank and the other is not, but both are most correctly classified as mortgage bankers. A lot of companies call themselves mortgage bankers and some deserve the title. For others, it is mostly marketing.
Mortgage Brokers are companies that originate loans with the intention of brokering them to wholesale lending institutions. A mortgage broker will already have established relationships with these companies. Underwriting and funding takes place at the wholesale lender. Many mortgage brokers are also correspondents, which is why many of them also claim to be mortgage bankers. Essentially, a Mortgage Broker is an intermediary that unites borrowers and lenders together, then will facilitate the loan process between these two parties. The job of the mortgage broker is to put borrowers and lenders in contact with each other. If this contact results in a loan, the broker receives a commission, often from both parties.
Much of the time, mortgage brokers are hired by prospective borrowers who either don’t know much about the lending industry, don’t have time to shop around for different types of loans, or both. A mortgage broker can evaluate different types of mortgages available to you. They can give you insight as to which banks or financial institutions offer the most competitive rates and the terms most compatible with your particular situation. This can often lead to specialized mortgages, which may be beneficial to the borrower’s unique circumstances. Note that when you enlist the services of a mortgage broker, you often have to pay an initial fee or commission once you obtain your mortgage.
Most mortgage bankers and portfolio lenders also act as wholesale lenders, catering to mortgage brokers for loan origination. Some wholesale lenders do not even have their own retail branches, relying solely on mortgage brokers for their loans. These Wholesale lenders will usually offer mortgage loans to mortgage brokers at a reduced cost than their retail branches offer them to the general public. The mortgage broker will then add their brokerage fee to the loan amount. For the borrower, this means the coast of a loan is essentially the same if they had gotten their loan directly from the retail branch of the wholesale lender. The advantage of going with the broker is that they may help select the optimal type of loan for you. More experienced borrowers, however, may opt for borrowing directly from the lender.
Any institution that lends its own money and originates loans for themselves is called a "portfolio lender". This is because they are lending from their own portfolio of loans and are not worried about being able to immediately sell them on the secondary market. By doing this, these institutions can establish their own guidelines for approving or rejecting loan applications, otherwise they would have to follow guidelines suggested by the mortgage bankers and providers (i.e. Fannie Mae, Freddie Mac).
Like mortgage bankers, portfolio lenders may offer fixed-rate loans and government loans. Once a borrower has made the payments on a portfolio loan for over a year without any late payments, the loan is then considered to be "seasoned". A seasoned loan becomes more marketable, even if it does not meet Freddie/Fannie guidelines, and can then be saleable on the secondary market. Selling these "seasoned" loans frees up more money for the "portfolio" lender to make more loans, which is another way that portfolio lenders engage in mortgage banking. If the loans are sold, they are packaged into pools and sold on the secondary market. You will probably not even realize your loan is sold because, quite likely, you will still make your loan payments to the same lender, which has now become your "servicer."
A Direct lender applies to any lenders that fund their own loans. Therefore, a direct lender can range anywhere from the biggest financial institution to a small independent company. Direct lenders may include mortgage bankers, portfolio lenders, or small lending companies. Banks and Savings & Loans obviously have deposits they can use to fund loans with, but they usually use warehouse lines of credit from which they draw the money to fund the loans. Similarly, smaller institutions also have warehouse lines of credit from which they draw money to fund loans.
Correspondent is usually a term that refers to a company that originates and closes mortgage loans in their own name. Instead of selling those loans in pools, they sell them individually to a larger lender, called a sponsor. The sponsor may acts as the mortgage banker, re-selling the loan to Ginnie Mae, Fannie Mae, or Freddie Mac as part of a pool.
The correspondent may fund the loans themselves or funding may take place from the larger company. In any case, the sponsor usually underwrites the loan. A correspondent is similar to a mortgage broker, except that there is usually a very strong relationship between the correspondent and their sponsor.