Mortgage Industry Explained

Buyers have many options to getting money to buy a house.  A Bank is only one of many options and will not necessarily be your best option. Choose options that fit your specific needs.

BANKS

Banks offer products that differ in many ways.  The plain vanilla mortgages known, as FNMA, FHLMC, FHA, VA and RD are the standards of the industry.  However, some banks shy away from government loans altogether. 

Banks generally do not offer to “broker out” a loan to make it happen.  They issue a denial letter rather than solve conditions in an attempt to satisfy one set of underwriting guidelines. 

Portfolio loans at banks allow them to lend to anyone for anything.  Portfolio loans generally have adjustable rates and a term of less than 30 years with scheduled renegotiations required.  If the bank is comfortable with the circumstances of the loan, then they design terms and costs to reflect their management of the risk they accept.  Most frequently these include larger down payments and / or cross collateralization of additional property or assets.

Costs are high for Bricks and Sticks (buildings) and multiple levels of management.

MORTGAGE COMPANIES

True mortgage companies are frequently like banks in that they reflect a single source for funds and thus a single set of underwriting guidelines.  Mortgage companies are generally a division of a bank but they are not limited to them, some stand-alone. Think of a little less “bricks and sticks” and a little more management over their personnel than Banks.  They are more sales-oriented than Banks.

MORTGAGE BANKS

Mortgage banks are characterized by their ability to lend from their own lines of credit.  They fund loans and sell loans on the secondary market to groups like mortgage companies and banks.  However, they generally also offer options to “broker out” loans that are unacceptable to their line of credit guidelines in an effort to make a deal work.  They also frequently offer suggestions to Mortgage Loan Officers to help keep a loan or “broker it out”.  Mortgage banks are also known for having smaller investments in “bricks and sticks” and maintaining a very lean staff, thereby producing a less expensive business model for bringing a loan to market.

MORTGAGE BROKERS

With Mortgage Brokers all loans are sold off to a lender.  The Mortgage Loan Officer selects the lender based upon the problem characteristics of a loan file that can be accommodated at one lender as opposed to another.  All lenders and lending are not equal.  Brokers represent the lowest “cost-to-market” in the industry and thereby have very aggressive rates and prices without lots of fancy gimmicks.

In Summary

Banks offer a specific product at a price.  They are very good and very formal in their handling of clients.  Therefore, most jumbo lending is done at banks.  Many clients believe that their checking account has created a real relationship with their bank and consider themselves a known commodity at the bank.  Banks promote this concept strongly to their customers.  The premier service at a bank is a portfolio loan, which is in effect a relationship-based loan.

Mortgage Companies, by virtue of their size and volume, are more aggressively priced than banks.  Mortgage companies are also able to represent themselves as big players in the industry.  Mortgage companies are also known for a high level of service as well as innovators of new products.

Mortgage Banks often out-price banks and mortgage companies.  They are frequently industry leaders in technology as well as consumer-oriented legislation.  However, they are rarely household names.

Mortgage Brokers are the local face of mortgage lending.  These “rugged individualists” make names for themselves by working closely with clients and agents to find solutions to consumers’ difficulties in obtaining financing.  These solutions frequently take time, which becomes the commodity that brokers are able to offer.