What is a Mortgage Banker?
A Mortgage Banker is a specialized type of financial intermediary that primarily focuses on originating, selling, and servicing mortgage loans. Unlike mortgage brokers, who serve as intermediaries between the borrower and potential lenders, mortgage bankers actually fund the loans using their own or borrowed capital and then may sell these loans to investors.
Role and Functions:
- Origination: Mortgage bankers manage the entire process of creating new mortgage loans, including underwriting and funding.
- Selling: After origination, they often sell these loans to investors (e.g., Freddie Mac, Fannie Mae, regional banks) and may retain the servicing rights.
- Servicing: They manage the loan throughout its life, which includes collecting monthly payments, ensuring property taxes are paid, maintaining appropriate insurance, and more.
Examples:
- The Mortgage Store is a mortgage banker that originates 100 loans totaling $20 million. They sell this loan package to an out-of-state investor for $20.4 million. The Mortgage Store continues to service these loans by collecting monthly payments from homeowners, ensuring property taxes and insurance premiums are paid, and charging the investor a servicing fee of ⅜ of 1% of the loan principal.
Frequently Asked Questions (FAQs)
What is the difference between a mortgage banker and a mortgage broker?
- Mortgage Banker: Uses its own capital to fund loans, oversees the entire loan process, and often services the loan.
- Mortgage Broker: Acts as a middleman between borrowers and lenders, earning a commission for matching clients with lenders, without funding loans themselves.
How do mortgage bankers make money?
Mortgage bankers earn money through origination fees, selling mortgages at a premium to investors, and through servicing fees on the loans they manage.
Why might a borrower choose a mortgage banker over a mortgage broker?
Borrowers might opt for a mortgage banker due to potentially faster loan processing times, direct access to funds, and the convenience of end-to-end service from origination to servicing.
What risks do mortgage bankers face?
Mortgage bankers face interest rate risk, credit risk, and liquidity risk. They must manage fluctuations in market interest rates, ensure borrowers comply with loan agreements, and maintain adequate liquidity to fund loans.
Mortgage Broker
A professional who matches borrowers with lenders while the lenders ultimately provide the financing. Brokers earn commissions based on the loans closed.
Loan Servicing
The ongoing administration and management of a loan from its initiation through its payoff, including collection of payments, tax processing, and insurance handling.
Mortgage-Backed Security (MBS)
A type of investment that is backed by mortgage loans. Investors receive periodic payments derived from the homeowners’ mortgage payments.
Loan Origination
The complete process of obtaining approval for a mortgage loan from application submission to loan disbursement.
Online Resources
References
- “The Mortgage Encyclopedia” by Jack Guttentag
- “Mortgage Banking Terms” by MBA
- “The Real Estate Finance and Investment Manual” by Jack Cummings
Suggested Books for Further Studies
- “The Mortgage Warrior: Mortgage Truths That Will Save You Thousands” by Dale Verge
- “Mortgage Banking 101: A Practical Guide for Financial Education” by Patsy Laveskate Thom
- “Real Estate Finance and Investments” by William Brueggeman and Jeffrey Fisher
Real Estate Basics: MORTGAGE BANKER Fundamentals Quiz
### Who funds the loans in the case of a mortgage banker?
- [x] The mortgage banker
- [ ] A mortgage broker
- [ ] The borrower directly
- [ ] The seller of the property
> **Explanation:** A mortgage banker uses its own funds or borrowed money to issue loans.
### What does a mortgage banker do after originating a loan?
- [x] They often sell the loan to investors and may retain servicing rights.
- [ ] They pass it on to the appropriate mortgage broker.
- [ ] They only collect commissions from the transaction.
- [ ] They typically foreclose the property and sell it to another buyer.
> **Explanation:** After originating a loan, a mortgage banker frequently sells it to investors while possibly retaining the servicing responsibilities.
### What is one key difference between a mortgage banker and a mortgage broker?
- [x] A mortgage banker funds loans using its own capital, while a broker does not.
- [ ] A mortgage banker only provides advisory services.
- [ ] A mortgage broker directly handles borrower payments.
- [ ] A mortgage banker cannot sell loans to investors.
> **Explanation:** Unlike mortgage brokers, mortgage bankers fund the loans themselves, using either their own or borrowed capital.
### How do mortgage bankers primarily earn revenue?
- [x] Through origination and servicing fees as well as selling loans at a premium.
- [ ] By paying out commissions to mortgage brokers.
- [ ] By receiving grants from the federal government.
- [ ] Through investment in commercial properties.
> **Explanation:** Mortgage bankers generate revenue through origination fees, servicing fees, and by selling mortgage loans at a premium.
### Which overactivity is NOT typically the responsibility of a mortgage banker?
- [ ] Origination
- [ ] Servicing
- [x] Conducting home inspections
- [ ] Loan selling
> **Explanation:** Performing home inspections is not typically part of a mortgage banker's responsibilities.
### What servicing activities might a mortgage banker perform?
- [x] Collecting monthly mortgage payments, ensuring property taxes and insurance are paid.
- [ ] Conducting regular property market evaluations.
- [ ] Providing home renovation consultations.
- [ ] Acting as a property manager by leasing units.
> **Explanation:** Mortgage bankers handle servicing activities like payment collection, ensuring taxes and insurance are paid.
### To whom might a mortgage banker sell originated loans?
- [x] Institutional investors, such as Fannie Mae and Freddie Mac.
- [ ] Individual home buyers.
- [ ] Mortgage brokers.
- [ ] Federal and state governments directly.
> **Explanation:** Mortgage bankers sell loans to institutional investors, including entities like Fannie Mae and Freddie Mac.
### What is one risk unique to mortgage bankers?
- [ ] Landscaping risks
- [x] Interest rate risk
- [ ] Broker commission risk
- [ ] Consumer protection risk
> **Explanation:** Interest rate risk is a unique challenge mortgage bankers face due to the fluctuations in market interest rates.
### How does retaining servicing rights benefit mortgage bankers?
- [x] It provides additional revenue through servicing fees.
- [ ] It allows for controlling property values.
- [ ] It aligns their interests with local real estate development.
- [ ] It leads to direct homeowner transfers.
> **Explanation:** Retaining servicing rights allows mortgage bankers to earn ongoing revenue through servicing fees.
### What term describes the continued management of a mortgage loan?
- [x] Loan Servicing
- [ ] Loan Origination
- [ ] Mortgage Acquisition
- [ ] Investor Relations
> **Explanation:** The ongoing management of a mortgage loan, including payment collection and handling insurance and taxes, is known as loan servicing.
