In Part 1, I provided some background info on what happens with most mortgages after the close of escrow and in Part 2, I explained what depository lenders were and some of the pros and cons of those types of lenders. In Part 3, I want to continue with explaining the different types of lenders. At this time, I would like to explain the types of lenders that only engage in mortgage lending.
While there are advantages and disadvantages of using any type of lender, working with lenders that focus on nothing but mortgage loans can be much more beneficial to you as both a homebuyer and/or homeowner. The two most common types of these organizations are mortgage bankers and mortgage brokers.
For starters, mortgage bankers and brokers tend to be smaller, privately owned companies that are more attuned to their local market. Mortgage bankers and brokers may also have direct relationships and reputations with a variety of local companies and agencies that the big, behemoth, national, retail banks don't have.
These relationships and reputations can sometimes be the one thing that many prospective homeowners, especially first time buyers, are often in need of and are looking for in their lender.
So what's the difference between mortgage bankers and mortgage brokers?
Mortgage Banker: A mortgage banker is not regulated as a federal or state bank and does not take deposits from consumers. Mortgage bankers will often have many different sources of loan options, in addition to their own small suite of loan products, in which they can offer their borrowers. Mortgage bankers will often fund some of their loans through their own warehouse line of credit.
Like most lenders, mortgage bankers will also sell their loans off to the secondary market after the close of escrow. Mortgage bankers also employ their own underwriters in order to maintain control over some of their loan transactions. However, because mortgage bankers are selling their loans off to the secondary market after the close of escrow, their loans must adhere and be underwritten in accordance to the rules, regulations and guidelines for the loan program as well as the government sponsored enterprises (GSE).
When selling loans on the secondary market, mortgage bankers will earn a servicing release premium (SRP) for allowing the secondary market investor to service the loan. This SRP rate is not disclosed to the borrower.
Mortgage Broker: Mortgage brokers are organizations that originate loans on behalf of other lenders. One of the best advantages of a mortgage broker is their ability to shop around for the best loan option for a particular borrower in order to meet a particular mortgage need. Mortgage brokers typically have dozens and dozens of lending options available to offer their clients.
Mortgage brokers typically deal with wholesale lending institutions (who do not work directly with borrowers) as well as direct lenders and portfolio lenders. I will explain what wholesale lenders are in an upcoming post. Consequently, mortgage brokers do not have to employ underwriters but rather work very closely with the underwriters for the wholesale, direct and/or portfolio lenders that they contract with. Mortgage brokers also do not fund and/or service their loans.
However, because the loans that mortgage brokers are originating will be sold off to the secondary market after the close of escrow, mortgage brokers loan packages must be originated and processed in accordance to the rules, regulations and guidelines for the loan program as well as the GSE.
After the close of escrow, before the mortgage is sold off to the secondary market, mortgage brokers will earn a loan origination fee that they must disclose to the borrower, which makes mortgage brokers fees much more transparent than the fees of any other type of lender. Mortgage brokers do not earn an SRP like other lenders who do not have to disclose this fee to the borrower making the fees of other types of lenders much less transparent to the borrower.
The mortgage loan originators (MLO) that work for mortgage bankers and mortgage brokers must be licensed in accordance with the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act.
This means that MLO's for mortgage bankers and brokers must adhere to any upfront and/or any annual continuing education in order to continue originating loans. They also must submit to any federal and state testing in order to measure their education, knowledge and/or experience in the mortgage industry.
MLO's for mortgage bankers and brokers must also be subjected to FBI background checks, they must be finger printed and they also must agree to personal credit checks. Furthermore, there is a national complaint mechanism for reporting unethical and/or illegal activities on MLO's for mortgage bankers and mortgage brokers.
MLO's that work for mortgage bankers and mortgage brokers are much more regulated and monitored than the MLO's that work for banks who do not have to be licensed, tested, finger printed and or checked and monitored.
Stay tuned for Part 4 where I discuss a few other types of lenders in the mortgage industry.
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 1
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 2
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 4
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 5
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 6
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Donne Knudsen
Realtor® - CalState Realty Services
DRE#: 01364050 / NMLS#: 249822
805.2069123
Serving low-medium income individuals and families as well as first time buyers with both their real estate as well as their mortgage needs including down payment assistance
Los Angeles County -- Ventura County
© 2010 - All Rights Reserved
Donne, fantastic post! You have provided a valuable service for consumers and agents alike, I would recommend agents provide your post to their clients as a way of explaining their mortgage choices. Thank you for allowing the re-blog...I am going to share locally.
Donne: I caught the re-blog of your post on Deborah's blog ... so congrats on her decision to post it! Very well written, as usual. As I told Deborah ... I'm a big believer in ALL lenders having to take the current testing demanded of us Mortgage Bankers and Mortgage Brokers. That way the public knows that all of us are up-to-date on current lending programs and guidelines and they will be receiving better service. The fact that some get a pass on this requirements ... just seems unfair ... and short-sighted.
Gene
I feel like I am getting an education here Donne. Another great, in-depth explanation of this complicated field.
Thanks for including the series in my outside blog!! Very very packed full of 411 for the consumer to make their own decisions!
Hope you had a productive Monday Donne!
This is a great in depth series Donne. I've learned a lot and bookmarked all these posts so that I could easily email a link to client wanting info about types of lenders.
Tammy - All of this is info that I typically go over with many of my own clients. As a mortgage gal, I think it's really important that consumers and prospective homebuyers are informed and educated about not only the loan process but the mortgage industry as well so that they can make their own informed decisions on who they want to use for their mortgage needs.
Renee - I couldn't agree with you more about this being stuff that all consumers need to know. The more educated that consumers become about the loan process, the more likely they will be able to make their own decisions about their choice of the mortgage person they want to use.
Jane - The mortgage industry is complicated and it is just as important that Realtors understand as much as they can as it is for consumers to understand it.
Thx for stopping by ladies; I really appreciate it and I'm glad that you like the series and I hope you stay tuned for the rest of it.
Gene - I too think it's absolutely ludicrous that all MLO's are not held to the same standards. However, the fact that we mortgage bankers and brokers are held to a higher standard than bank reps is definitely something that we need to make sure that consumers and prospective home buyers are aware of.
The fact that we are held to a higher standard is something that most consumers and prospective homeowners value and consider important in the MLO they choose to work with.
Deborah - I'm glad you like the series; I appreciate it and the reblog.
Thx for stopping by folks; I really appreciate it.
Donne: Amazing viewpoint! It's like taking lemons and making lemonade!! I am definitely going to borrow it ... Thanks!
As always, Gene
Gene- With the barrage of crap that is spewing out there on the internet about us (mortgage bankers/brokers), we have to do the best we can with what we have to work with. It was after reading a post here on AR that actually inspired me to write this series.
After reading that post, I realized that we (mortgage bankers/brokers) still have so much work to do in educating consumers and prospective homebuyers about the benefits of working with us rather than some other kind of lender. This series was written in an effort for consumers and prospective homebuyers to be able to make their own decisions about the kind of lender they need and want so that they don't have to try and decipher through all the crap out there.
I hope you stay tuned for when I discuss choosing a specific MLO. Thx for stopping by Gene; I always appreciate your feedback and support. Have a good day, my friend. :)
Great stuff Donne. I'm not sure where we disagree. Granted, we are in different states and markets, but I can't find anything I'd take issue with.
JP - I'm glad you have liked the series. It's been a hectic week and my workload hasn't afforded me much time to do much writing but I should have Part 5 up shortly.
The inspiration for this series was a post you did a few weeks ago where you addressed the disadvantages of using a mortgage broker and I felt you portrayed mortgage brokers in a negative aspect. After reading your post, I realized that consumers needed more information than what you provided before making their decision on what type of lender is best for them.
While a direct lender is a good option for some borrowers, for other borrowers, going to a direct lender is their worst option and those are the borrowers that are best served by a mortgage broker. If there were no more mortgage brokers, there would be even more qualified buyers who are unable to get a loan than there already are and I know you know what I mean when I say that.
Once again, your post described the reasons why some borrowers will be better served by a direct lender but there is a much larger group of borrowers (and getting larger every day) that are going to be better served by a mortgage broker. I am hoping that my series will educate those buyers into being able to decide for themselves what type of lender is best for them and not just believe everything they read on the internet but rather do some good research before choosing the best type of lender for their needs. JMHO