What is a Mortgage Bank?
The term “mortgage bank” refers to the banks specializing in lending mortgage loans, where they are involved in originating and servicing the loans. These banks either use their capital or borrow from other bigger lenders to extend mortgage loans to the borrowers. They service the loans by collecting payments from the borrowers in installments or selling their loans in the secondary market. Mortgage banks are also popularly known as mortgage lenders.
How does a Mortgage Bank work?
A mortgage bank usually loans money to borrowers investing in real estate properties. The bank then places the loan on a pre-specified warehouse line of credit sold in the secondary market. The interested investors (large banks and corporations) purchase these loans from the secondary market. The funds received in this way are used to pay for the warehouse lines of credit, enabling the bank to continue its lending operations.
Typically, mortgage banks function according to the banking laws applicable to the state in which they operate. On the other hand, the credit risk associated with these mortgage loans is absorbed by institutions like Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae).
Example of Mortgage Bank
There are a variety of mortgage banks in the financial market, from the ones that provide mortgage loans to small mom-and-pop shops to the ones that only offer loans to large institutions. The following are some of the largest mortgage banks in the US.
It is a California-based lender that deals in both mortgage and non-mortgage loans. In 2015, the lender became the second largest non-bank provider of direct-to-consumer loans in the US. Over the years, the lender has leveraged technology to automate its loan processing system, allowing customers to apply for a mortgage loan without manual intervention.
2. Rocket Mortgage LLC
The lender was formerly known as Quicken Loans LLC. It is a Downtown Detroit-based mortgage loan provider. In 2018, the lender surpassed Wells Fargo to become the US’s largest retail home loan lender. Rocket Mortgage is also the largest online mortgage lender in the retail space. It relies on wholesale funding instead of deposits for extending loans and follows the online application route instead of the branch system.
Functions of Mortgage Bank
A mortgage bank performs the following functions as part of its day-to-day activities:
- Solicit business opportunities by identifying individuals and corporations who require funds and have assets to offer as collateral.
- Perform financial analysis wherein they verify the financial stability of their existing customers and keep track of the ongoing market conditions to predict future trends.
- Offer financial counseling to high net worth individuals (HNIs) and corporations with excess funds who want to invest in opportunities to generate healthy returns.
- A process known as loan origination is to provide mortgage loans to prospective customers. This process involves verifying customer documents, assessing customers’ repayment capacity, and valuing the collateralized assets.
- To offer loan servicing, wherein the bank services the mortgage loans and earns servicing fees in exchange.
Benefits of Mortgage Bank
Some of the major benefits of a mortgage bank are as follows:
- Unlike the big banks and credit unions that deal in various financial products, mortgage banks offer only mortgage loan products. So, they can focus on a single product and develop extensive expertise, demonstrated while processing and closing mortgage loans.
- The mortgage banks usually operate through a mix of online and retail branches, unlike big banks, which operate primarily through retail locations. This results in a lean cost structure.
- Limited product focus, lean cost structure, and direct lending capabilities help the mortgage banks offer loans at highly competitive terms, such as lower fees and interest rates.
Disadvantages of Mortgage Bank
Some of the major disadvantages of a mortgage bank are as follows:
- Some mortgage banks don’t offer a full range of products, so borrowers with unique requirements may need to choose other borrowing options.
- In most cases, the mortgage banks sell the loans to third parties after the loan origination stage. So, the borrowers may not receive the service they are promised at the lending time.
- Mortgage banks usually have fewer financial resources than larger banks or credit unions. So, they have to rely on third parties for the funding to operate and offer mortgage loans.
Some of the key takeaways of the article are:
- A mortgage bank is a lender that specializes in providing mortgage loans. It is usually involved in loan origination and its servicing.
- The two primary sources of revenue for a mortgage bank include fees for the origination and servicing of loans.
- Mortgage banks offer highly competitive loans due to narrow product focus, lean cost structure, and direct lending capabilities.
- Mortgage banks function as per the banking laws applicable to the state in which they operate.
So, a mortgage bank is a specialized lender focusing only on one loan product – mortgage loans. It functions in a highly structured way as per the law of the land. Its objective is to maximize the lending rate to generate increased profitability on the back of the yield spread premium. They need to follow the strict regulations set up by the banking authority of the state.
This is a guide to Mortgage Bank. Here we also discuss the definition, working, example, and functions along with benefits and disadvantages. You may also have a look at the following articles to learn more –