Mortgage Banks Vs. Commercial Banks – What’s The Difference?

Here are some of the major commercial banks that are heavily involved in residential mortgage lending: Wells Fargo, Bank of America, JPMorganChase, U.S. Bank and PNC Bank.

Here are several major mortgage banks that now help dominate residential mortgage lending: Rocket Mortgage; United Wholesale Mortgage; CrossCountry Mortgage; loanDepot; Fairway Independent Mortgage; Guild Mortgage; Guaranteed Rate; and American Pacific Mortgage.

There are enormous and very important differences between mortgage banks and commercial banks. I am explaining the differences in today’s blog at the request of several agents who responded to this blog from last week: Mortgage Banks Do Not Report to ICE, Homeland Security, IRS, FBI, or Any Other Agency – Unless They See Obvious Fraud. In that blog, I explained how mortgage banks never report citizenship or tax issues or anything else other than blatant document fraud. But I also mentioned that commercial banks tend to be stricter about what they report, and that is what prompted the questions.

Commercial Banks

Commercial banks (and credit unions) offer much more than just mortgage financing. They offer checking and savings accounts, auto loans, personal loans, letters of credit, lockboxes, commercial loans and much more. They are much more heavily regulated and bureaucratic than mortgage banks. Their source of funds for lending includes customer deposits and interbank borrowing, among other things – making their “cost of funds” much lower than mortgage banks. They also offer “private banking” channels for high-net-worth clients with very advantageous rates and terms.

Commercial bank advantages include:

1. Low cost of funds – which enables them to offer lower rates on occasion (mostly on the jumbo front).
2. The ability to offer Community Reinvestment Act Loans or special first-time homebuyer loans that are not always available to mortgage banks.
3. The ability to retain loans in their portfolio that don’t meet particular guidelines that mortgage banks must meet.
4. Franchise value or name-goodwill, in that customers sometimes tend to trust to commercial banks more simply because of their size and notoriety – providing a steady stream of customers for the banks.

Commercial bank disadvantages include:

1. Bureaucracy and the inability to move quickly; most commercial banks could never consistently close in 12 calendar days like most competent mortgage banks now can.
2. Higher rates for conforming, FHA and VA loans sometimes, as mortgage banks are simply more efficient with these loans now; and some commercial banks don’t even offer FHA or VA loans.
3. Appraisals are often issues too, as most commercial banks use large appraisal management companies that do not provide the skills or service that a locally managed appraiser pool offers.  Most mortgage banks, in contrast, manage their own pool of local appraisers, ensuring that service levels and appraisal quality remain much higher.

Mortgage Banks

Mortgage banks do not do anything other than originate and fund mortgage loans. They do not offer any traditional banking services like checking or savings accounts. They never keep any loans in a portfolio (they are not allowed to in most cases), and they sell every loan they fund on the secondary market as quickly as they can (usually within 1 to 3 weeks of funding). They also fund all of their loans off of a large warehouse line of credit that needs to be paid back as soon as a loan sells.

Mortgage bank advantages include:

1. Speed, nimbleness and efficiency, simply because they lack the bureaucracy, overhead, and regulatory pressures of commercial banks.
2. The ability to offer more loan products overall, including non-QM loans (DSCR, Bank Statement, etc.), FHA and VA loans, as some commercial banks do not offer those loans.
3. Lower rates for conforming, FHA and VA loans sometimes because of their lower overhead and efficiencies.

Mortgage bank disadvantages include:

1. Higher cost of funds, as mortgage banks borrow from warehouse lines to fund loans, and those warehouse charge interest that is far higher than the very low or non-existent interest payments commercial banks pay their depositors.
2. The lack of access to government sanctioned lending programs like CRA loans.

NOTE: Mortgage banks now control as much as 65% of the mortgage market while commercial banks and credit unions only control a little over 35%. In 2011, after the Great Financial Crisis, those percentages were reversed, as the mortgage banking channel got pummeled by the crisis and had difficulty adjusting to the new regulatory requirements.

Mortgage Brokers

Mortgage brokers only originate loans. They do not have underwriting or funding arms like mortgage banks and commercial banks do. They simply originate loans and package them to get underwritten and funded by other mortgage banks.

Mortgage broker advantages include:

1. Very low overhead, and the ability to offer very low rates on occasion.
2. The ability to shop loans amongst many lenders for the best rates or term (note: some mortgage banks, like JVM Lending, have access to the broker channel and thus also have this ability too when necessary).

Mortgage broker disadvantages include:

1. The inability to control for speed, as they rely on other lenders to underwrite their loans.
2. The inability to establish direct relationships with major banks, preventing them from accessing better jumbo rates or special government programs (about 60% of JVM’s loans over the last month, for example, have been special programs that brokers do not have access to).
3. Appraisals. Brokers usually have to use large appraisal management companies (like commercial banks do), and that impacts appraisal service and quality.

NOTE: JVM Lending left the broker channel for the direct mortgage banking channel in 2015 because of these disadvantages.