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5/03/2013

Types of Mortgage Lenders


Types of Mortgage Lenders
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Porfolio lenders

A portfolio lender is institution which lends their own money and originates loans in their own name. They are lending for their own portfolio of loans and not worried about being able to immediately sell them on the secondary market. Because of this, they don't have to obey Fannie Mae and Freddie Mac (called GSE’s) guidelines. A portfolio lender can create unique sets of rules for determining the soundness and pricing of a loan.

Often only a portion of their loan programs are "portfolio" product. If they are offering fixed rate loans or government loans, they are certainly engaging in mortgage banking as well as portfolio lending.

Once a borrower has made the payments on a portfolio loan for over a year without any late payments, the loan is considered to be "seasoned." Once a loan has a track history of timely payments it becomes marketable, even if it does not meet Freddie/Fannie guidelines it might be sold in a group to an investor. Or these may be held if the rates are a bit higher, there is a small margin of profitability in holding the servicing. If the lender can sell off loans for a profit (say servicer offers .49% today, they are often grouped into bundles or tranches then sold for a profit to an institutional servicer or investor. The loans are grouped into a Trust that a number of investors may “buy” as a group entity hoping the higher than market rates will not get paid off for a predetermined estimation of time (say they think loans at 5.5% with certain traits: location, FICO, borrower type, age of borrower, just about any set of thousands of details that analysts can rate a bucket).They “guess” the loan will remain in the bucket paying for five more years.

Selling these "seasoned" loans frees up more cash for the "portfolio" lender to make more loans, which is another way that portfolio lenders engage in mortgage banking. If the loans are sold, they are packaged into pools and sold on the secondary market. You will not even know your loan is sold because, quite likely, you will still make your loan payments to the same lender, which has now become your "servicer."


Lenders are considered to be direct lenders if they fund their own loans. A "direct lender" can range anywhere from the biggest lender to a very tiny one. Banks and savings & loans obviously have deposits they can use to fund loans with, but they usually use "warehouse lines of credit" from which they draw the money to fund the loans. Smaller institutions also have warehouse lines of credit from which they draw money to fund loans. Smaller institutions obviously cannot fund big production lumps that always occur when rates are volatile.

Direct lenders usually fit into the category of mortgage bankers or portfolio lenders, but not always.

One way you used to be able to distinguish a direct lender was from the fact that the loan documents were drawn up in their name, but this is no longer the case. Even the tiniest mortgage broker can make arrangements to fund loans in their own name.

Direct lenders are generally companies that underwrite a loan themselves. There are two types of direct lenders. There are about 3200 lenders who call themselves direct but in fact are too small, and undercapitalized to actually fund much direct

Type One: The difference between a direct lender and any other type of mortgage provider, is that they are more nimble. What makes a direct lender different is the fact that they generally have a very large line of credit with another financial institution which allows them to write large checks for your mortgage. However, once the mortgages closed, they will always sell the loan off to someone else to service the loan and collect payments on the loan.

Type Two Direct Bankers who can both portfolio the loans the close and sell them. There are only 100 super funded institutions that can do this. This group is going to be the survivors and drivers when our Federal Government starts to wind down the GSE’s

 


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Correspondent is usually a term that refers to a company which originates and closes loans in their own name, then instead of selling those loans in pools. They sell them individually to a larger lender, called a sponsor. The sponsor acts as the mortgage banker, re-selling the loan to Ginnie Mae, Fannie Mae, or Freddie Mac as part of a pool, or may hold the loans as they follow market trends.

Mortgage brokers deal with lending institutions that have a wholesale loan department.

It is almost like being a mortgage broker, except that there is usually a relationship between the correspondent and their sponsor.


Credit Unions sometimes operate as correspondents, although a large one could act as a portfolio lender or a mortgage banker. They often do not sell loans at all.

Bank 

anks and savings & loans usually operate as portfolio lenders, mortgage bankers, or some combination of both. A bank is a highly regulated institution that does a variety of things. They offer auto loans, credit cards, a checking or savings account, and a home loan, among other things. A bank is generally a one-stop shop for all things financial. Bank employees even the loan officers are not licensed and report to the bank. Loan officers as bank employees are part of a bureaucracy that expects them to sell you a checking account, use their insurance division and open the safe deposit box. Loan officers are not required to be licensed.

Banks tend to drop behind the Wizard’s screen when it comes to deciphering how they handle mortgages. That’s because some banks will service your home loan and own the rights to repayments for the life of the loan, while other banks will sell your loan to a third-party after you sign the paperwork. Most financial institutions that offer mortgages sell them to third parties. That said, some banks will both service some loans and sell others to third parties.


Mortgage brokers

Mortgage brokers are companies, or individuals, who have access to a variety of loan programs through various financial institutions. I actually worked as a mortgage broker for a period of time and we could access mortgages through all of the major banks, direct lenders, and any other lending institution nearby, with the exception of credit unions. The benefit of a mortgage broker is that, assuming you trust yours, he can do the shopping for you with all of the financial institutions he works with.

The other disadvantage is that although they have access to many different programs from many different lending institutions, they are a middle man, which means they will charge a fee for their service. There is nothing wrong with this inherently, in fact, the extra shopping a mortgage broker can do for you may get you the best deal on your mortgage; it’s just important to keep in mind that they do charge a fee for their services.

 

Internet lenders
Mortgage lenders have proliferated on the Internet in recent years, offering fast, easy loans at competitive rates. Some are online channels of brick-and-mortar financial institutions or mortgage brokers, others are Internet-based banks or brokers. Sometimes referred to as Consumer Direct. Where consumer does all the work.  Fine for a cookie cutter wage earner refinancing their only one single family house. Not good for self employed, complex, condominiums, larger loans above $417000, not good for a purchase can’t close on time, often rate lock is not honored.

 

 

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