bank
A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...
that specializes in originating and/or servicing
mortgage loan
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...
s. In the United States, a mortgage bank is a state-licensed banking entity that makes mortgage loans directly to
consumer
A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
s. The difference between a mortgage banker and a mortgage broker is that the mortgage banker funds loans with its own
capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used fo ...
.
Generally, a mortgage bank originates a loan and places it on a pre-established
warehouse line of credit {{Technical, date=July 2015
A warehouse line of credit is a credit line used by mortgage bankers. It is a short-term revolving credit facility extended by a financial institution to a mortgage loan originator for the funding of mortgage loans.
Th ...
until the loan can be sold to an investor, which are typically large institutions. The credit risk is typically absorbed by the Agencies, which include
Fannie Mae
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the N ...
, or
Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons Corner, Virginia.Ginnie Mae. 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 called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of the ...
. This is in contrast to the
primary market :''"Primary market" may also refer to a market in art valuation.''
The primary market is the part of the capital market that deals with the issuance and sale of securities to purchasers directly by the issuer, with the issuer being paid the proc ...
, which for mortgages typically refers to the bank buying the mortgage deed of trust from the homeowner for the face amount of the loan, adjusted for discount points and other price adjustments.
Mortgage banks sell the 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
A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit.
It can also refer to a bank, or a division of a large bank, which deals with ...
. 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 fee
An origination fee is a payment associated with the establishment of an account with a bank, broker or other company providing services handling the processing associated with taking out a loan.
An origination fee is typically a set amount for any ...
s, 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
The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of the ...
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. Many do not take deposits from customers, and call themselves Mortgage Lenders, to avoid being confused with a typical bank.
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 bankers risk their own capital to fund loans and therefore do not have to disclose the price at which they sell mortgages 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.
History
The market share for mortgage banks in the US of single family mortgage loans went from 20% in 1980 to over 41% in 1991 during the Savings and Loan Crisis.
See also
*
Bank
A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...
*
Capital market
A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers ...
*
Collateralized mortgage obligation
A collateralized mortgage obligation (CMO) is a type of complex debt security that repackages and directs the payments of principal and interest from a collateral pool to different types and maturities of securities, thereby meeting investor need ...
*
Credit union
A credit union, a type of financial institution similar to a commercial bank, is a member-owned nonprofit financial cooperative. Credit unions generally provide services to members similar to retail banks, including deposit accounts, provis ...
*
Financial institution
Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial inst ...
Secondary market
The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of the ...
Bank
A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...