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December 22, 2000
"What is the
difference between a lender and a mortgage broker?"
"What is the difference between a retail lender and a wholesale
lender?"
"What is a 'direct' lender?"
"What is the difference between a mortgage broker and a loan
officer?"
"What is a portfolio lender?"
The lender is the one who provides the money to the borrower at the closing table.
In exchange, the lender receives a note evidencing the borrower's debt
and obligation to repay, plus a lien on the subject property.
Mortgage brokers do not lend.
They are independent contractors who offer the loan products of multiple
lenders, called wholesalers.
A broker finds potential
customers and counsels them on the loans available from different
lenders. They also counsel on any problems involved in qualifying for a
loan, including credit problems, take the borrower's application, and
usually process the loan. Processing includes compiling the file of
information about the transaction, including the credit report,
appraisal, verification of employment and assets, and so on. When the
file is complete, it is handed off to the lender, who funds the loan.
Lenders who perform all the loan
origination functions themselves are called "retail lenders".
Lenders who have certain functions performed for them by mortgage
brokers are called "wholesale lenders". Many large lenders
have both retail and wholesale divisions. The division of functions is
shown below.
|
Function
|
Retail
Lender
|
Wholesale
Lender
|
Mortgage
Broker
|
|
Find
& counsel customers
|
X
|
|
X
|
|
Take
application
|
X
|
|
X
|
|
Lock loan
terms
|
X
|
X
|
|
|
Process
loan
|
X
|
|
X
|
|
Underwrite
loan
|
X
|
X
|
|
|
Close
& fund loan
|
X
|
X
|
|
The term "direct
lender" is one that small lenders sometimes use to distinguish
themselves from mortgage brokers.
Loan officers are employees of
lenders or mortgage brokers. Loan officers find, sell and counsel
customers, and take applications. Loan officers employed by mortgage
brokers may also be involved in loan processing. In the case of a
one-person mortgage broker firm, that person is both the broker and the
loan officer.
While loan officers are
employees, they act more like independent contractors. They are
compensated largely, if not entirely, on a commission basis. The typical
commission rate is 1/2 of 1% of the loan amount, and successful loan
officers earn 6 figure incomes.
Both lenders and mortgage
brokers post prices with loan officers to be offered to consumers. The
loan officers usually have limited discretion to reduce the price if
necessary to meet competition, and full discretion to raise the price if
they can. The difference between the posted price and the price charged
the consumer is called an "overage", and it is usually shared
with the loan officer.
Reasonably astute shoppers will
probably do better dealing with a mortgage broker than with a lender.
Because mortgage brokers deal with multiple lenders, they can shop for
the best terms available on any given day. In addition, they can find
the lenders who specialize in various market niches that many other
lenders avoid, such as loans to applicants with poor credit ratings. On
the other hand, the risk of encountering a rogue who will trick you into
paying more than you should is higher among mortgage brokers than among
lenders.
Borrowers
can guard against rogue brokers by selecting an Upfront Mortgage Broker
(UMBs). Conventional
mortgage brokers add a markup to the wholesale prices of lenders to
quote an all-in price to consumers. UMBs
in contrast charge a specified fee for their services, and pass through
the wholesale prices to the consumer.
There is little risk of chicanery in dealing with UMBs.
Lenders are further
distinguished as "mortgage bankers" or "portfolio
lenders." Mortgage bankers sell all the loans they make in the
secondary market because they don't have the long-term funding sources
necessary to hold mortgages permanently. They fund loans by borrowing
from banks or by selling short-term notes, repaying when the loans are
sold.
Mortgage banks now dominate the
US market. Of the 10 largest lenders last year, 9 were mortgage banks
and only one was a portfolio lender. However, many of the large mortgage
banks, such as Chase Manhattan Mortgage and Wells Fargo Mortgage, are
affiliated with large commercial banks.
Portfolio lenders include
commercial banks, savings banks, savings and loan associations, and
credit unions. They are sometimes referred to as "depository
institutions" because they offer deposit accounts to the public.
Deposits provide a relatively stable funding source that allows these
institutions to hold loans permanently in their portfolios. Washington
Mutual, a savings bank, is the only depository on the list of the 10
largest mortgage lenders.
Mortgage banks often offer
better terms on fixed-rate mortgages than portfolio lenders, while the
reverse is more likely for adjustable rate mortgages. It would be a
mistake to place too much reliance on this rule, however, because the
variability within each group is very wide.
Copyright Jack Guttentag
2002
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