Mortgage Banks: Your Guide to Home Loan Financing

A mortgage bank is a bank specializing in mortgage loans. It can be involved in originating or servicing mortgage loans, or both. The banks loan their own capital to borrowers and either collect payments in installments along with a certain rate of interest or sell their loans in the secondary marketSecondary MarketThe secondary market is where investors buy and sell securities from other investors. Examples: New York Stock Exchange (NYSE), London Stock Exchange (LSE)..

The scale of a mortgage bank’s operations varies. Some mortgage banking companies operate nationwide whereas some may originate a larger loan volume as opposed to operating nationwide.

Summary

• A mortgage is a debt instrument specific to the real estate industry. It is secured by the collateral of a real estate property.
• A mortgage bank is a bank specializing in mortgage loans. It can be involved in either originating or servicing mortgage loans, or both.
• A mortgage bank’s two primary sources of revenue are loan origination fees and loan servicing fees.

What is a Mortgage?

A mortgage is a debt instrument specific to the real estateReal EstateReal estate is real property that consists of land and improvements, which include buildings, fixtures, roads, structures, and utility systems. Property rights give a title of ownership to the land, improvements, and natural resources such as minerals, plants, animals, water, etc. industry. It is secured by the collateralCollateralCollateral is an asset or property that an individual or entity offers to a lender as security for a loan. It is used as a way to obtain a loan, acting as a protection against potential loss for the lender should the borrower default in his payments. of a real estate property. The borrower is obligated to pay back the loan over time. Mortgages make it easier to purchase large real estate properties without having to pay a large purchase price upfront.

The borrower instead gets the opportunity to repay the loan over time – in periodic installments in addition to interest payments. After paying back the loan, the borrower becomes the owner of the property free and clear. Mortgages can also be referred to as liens against property or claims on property.

How a Mortgage Bank Functions

Mortgage banks provide loans to clients purchasing real estate properties. The institutions then place the loans on a pre-established warehouse line of credit, wherein the loan is put on sale in the secondary market. Investors, typically large institutions and corporations, purchase or invest in such loans.

The credit risk associated with mortgages is typically absorbed by “the Agencies,” i.e., the Federal National Mortgage Association or “Fannie Mae,”Fannie MaeThe Federal National Mortgage Association, typically known as Fannie Mae, is a United States government-sponsored entity that was established to expand the secondary mortgage market by making mortgages available to low and middle-income borrowers. It does not provide mortgages to borrowers, but purchases and guarantees mortgages the Federal Home Loan Mortgage Corporation or “Freddie Mac,” and the Government National Mortgage Association or “Ginnie Mae.”

A mortgage bank operates under the banking laws applicable to each state they operate or do business in. The banks sell off the mortgage loans in the secondary market because the funds received thereafter pay for their warehouse lines of credit, which enables them to continue to operate and lend.

Primary Sources of Income for Mortgage Banks

Mortgage Bankers vs. Mortgage Brokers

In terms of loan origination, mortgage bankers risk their own capital to fund loans. Also, they are not required to disclose the price at which they sell mortgages.

On the other hand, mortgage brokers originate loans in the name of financial institutions and organizations. Regarding full disclosure, they need to disclose the additional fee(s) charged to the consumer under federal and state laws.

Related Readings

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