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Mortgage Banks vs. Commercial Banks; What’s the Difference? What’s Better?

Big HouseThe Wall Street Journal featured an article recently that stressed that buyers in a competitive market need a lender with a stellar reputation, an ability to close quickly, great communication skills, and local appraisers.

Big bank/commercial bank corporations are just that: they’re big. Large corporations tend to have huge amounts of clientele. As a result, they lack the finesse to turn on a dime when it comes to managing your loan application. In a hot market like California’s, every day, hour, minute counts towards getting your offer accepted. Buyers need a lender that moves efficiently and effectively.

Smaller and locally owned mortgage companies/banks (like JVM Lending) not only have the skill to close loans in fourteen days or less, we also have a more thorough understanding of the California real estate market and maintain much more control over the mortgage process.

Below we dive into the differences between Mortgage Banks and Commercial Banks – we’ll let you be the judge of which you consider to be better.

MORTGAGE BANKSRow of Houses

Mortgage Banks only underwrite, fund and sometimes service loans. They do nothing else. They hold no deposits, and they fund all of their loans with large warehouse lines of credit. Mortgage banks earn money by selling mortgages at a premium on the secondary market within a few weeks of funding.

Who:
Quicken Loans, Loan Depot, Guaranteed Rate, Guild Mortgage, Freedom Mortgage, Caliber Home Loans, RPM Mortgage, Summit Funding, CMG Financial. JVM Lending is part of a Mortgage Bank.

Activities:
Originating, Underwriting, Funding, and Servicing Mortgages.

Loan Officers:
NMLS and sometimes DRE (State) licensed (or both). JVM’s Mortgage Analysts have both DRE and NMLS licenses.

Source/Cost of Funds:
Warehouse lines of credit (employed to fund loans). A mortgage bank’s cost of funds is higher than a commercial bank’s b/c the warehouse lenders charge interest and fees.

Advantages:
Better service in most cases, b/c mortgage banks are usually smaller, less regulated, less bureaucratic and/or more nimble than big banks. Appraisals are another advantage, as many mortgage banks maintain internal appraisal management companies with more talented appraisers.

Disadvantages:
Interest Rates. Many mortgage banks have higher interest rates b/c they have a higher cost of funds and they must support higher commission expenses (for loan officers and middle managers). JVM is able to offer lower rates b/c our overall costs are much lower (we have no commissions or middle managers) and b/c we have direct access to investors with exceptionally low rates.

Note: Mortgage banks must be able to sell all of the loans they fund, or they will not only be unable to make money, they can go out of business entirely b/c they cannot simply leave a loan in their portfolio. Therefore mortgage banks must make sure every file is 100% compliant with guidelines and regulations – to ensure salability.

COMMERCIAL BANKS Mortgage Banks vs. Commercial Banks

Who:
Wells Fargo, B of A, Chase, Flagstar, Citi, U.S Bank

Activities:
All traditional bank activities such as checking and savings accounts, commercial lending, etc., and mortgage banking.

Loan Officers:
No licensing required. When NMLS licensing rules were imposed, many loan officers who could not pass their tests moved from mortgage banks to commercial banks.

Source/Cost of Funds:
Deposits.

Big BankAdvantages:
Deposits provide a very low cost of funds. Commercial banks are not vulnerable to unsalable loans like mortgage banks are b/c they can retain unsalable loans in their “portfolios.”

Disadvantages:
Bureaucratic and slow; unlicensed loan officers are often less knowledgeable; very high fixed overhead; appraisal quality is lower.

 

Jay Voorhees
Founder/Broker | JVM Lending
(925) 855-4491 | DRE# 01524255, NMLS# 335646