Who Funds Mortgage Loans? Banks, Credit Unions, Mortgage Banks, and Brokers
We host “Homebuyer Seminars” for buyers and “Mortgage 101 Seminars” for agents, and one of the slides that always derives a surprising amount of interest is the one that sets out the different mortgage origination channels.
This is because there are so many companies and individuals offering mortgages that it can be both very confusing and overwhelming for consumers and agents alike.
Because of this, I am revisiting the topic in today’s blog.
THREE PRIMARY CHANNELS FOR MORTGAGES
1. Commercial Banks and Credit Unions.
These big institutions dominated the mortgage industry after the 2008 meltdown but their overall market share has been dropping quickly in recent years, as Mortgage Banks and Brokers (see below) reclaim market share. The “big banks” include Wells Fargo, Citi, Chase, B of A and U.S. Bank, among others. Major Credit Unions include Navy Federal and USAA, but there are hundreds of others.
Advantages: Bank and credit union advantages include a low cost of funds; they can loan out customer deposits and sometimes offer low rates. They also can “portfolio” (or retain) tough loans that otherwise could not be sold on the secondary market.
Disadvantages: The big banks are very slow and bureaucratic largely because they are so heavily regulated. They also rely on national appraisal management companies that do not employ the best, local appraisers – so appraisal issues are common.
Private Banking: Commercial banks have an offshoot for “high net worth” customers called “private banking.” These channels often offer exceptionally low rates that other entities usually can’t compete with.
2. Mortgage Banks.
Mortgage Banks include Quicken, Guaranteed Rate, and Fairway at the national level, and RPM and SWBC at the regional level. JVM Lending is also part of a mortgage bank. Mortgage banks do not hold deposits; they ONLY thing they do is underwrite and fund mortgages. Mortgage Banks use lines of credit to fund mortgage loans and then quickly sell the loans to investors or third parties to make money.
Advantages: Mortgage Banks can typically move much faster than commercial banks becuase they are less regulated, smaller and more nimble. They can also set up their own appraisal management companies, ensuring access to local appraisers and better appraisal quality.
Brokers do not underwrite or fund loans. They only “originate” loans and then send them to outside “wholesale” lenders for underwriting and funding.
Advantages: Brokers can access dozens of different wholesale lenders and submit loans to whichever lender is offering the lowest rates or best terms at any given time.
Disadvantages: Wholesale lenders force brokers to use national appraisal management companies (like the big banks use) and there are frequent appraisal issues as a result. In addition, brokers have no control over underwriting (because it is not “in-house”) and turn-times. Brokers also have very few competitive options for jumbo financing.
JVM was in the broker channel for years but left it in 2014 because we had too many appraisal and service issues.
Founder/Broker | JVM Lending
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