Mortgage Banks
The business model of mortgage banks fits their specialization in providing potential home buyers with the best possible mortgage loans available in the market. A mortgage bank may originate the loan itself or simply provide the customer with the servicing facility. Some banks even do both. Typically, mortgage banks loan their own money to the borrower and may either choose to collect the loan repayments in monthly installments, inclusive of interest, or re-sell the loan in a secondary market for a profit.
The overall operational scale of mortgage banks may generally vary. While some mortgage banks operate on a nationwide scale, others engage in originating much larger mortgage loan volumes to compensate for their more centralized or focused operations.
Brief Summary
- Mortgages are debt instruments that are specific to real estate markets. They are secured through the real estate itself serving as collateral.
- Mortgage banks specialize in providing home mortgages. They either originate the mortgage loans or simply service them, at times doing both.
- Two main revenue sources for the mortgage banks are the fees for loan origination and the fees for loan servicing.
How a Mortgage Works
As debt instruments, mortgages are specific to real estate markets. They are secured through the real estate serving as collateral. Borrowers are obliged to repay the loan, including interest, over a specific period of time. Mortgages generally facilitate buyers in being able to purchase larger properties, compared to what they may otherwise be able to afford, plus the additional benefit of not having to raise a huge upfront amount for the purchase.
Instead, the borrower gets to repay the mortgage loan through monthly installments, inclusive of interest, over a longer period of time. Upon full and final repayment of the mortgage loan, plus the interest, the borrower gains the legal right, along with all the benefits and privileges attached to the title of that property. Mortgages are also referred to as potential liens against a given property or as claims to the same.
Functions of Mortgage Banks
Mortgage banks facilitate customers in purchasing their choice properties by providing them with mortgage loans. The loans are then placed by the banks on what are known as pre-established warehouse lines of credit, whereby the loans are put-up for sale in a secondary market. Henceforth, large institutions and multinational corporations purchase such loans for investment and their asset building purposes.
Credit risks associated with mortgage loans is generally absorbed by the so-called “Agencies”, including the Federal National Mortgage Association (commonly known as “Fannie Mae”), the Federal Home Loan Mortgage Corporation (commonly known as “Freddie Mac”), and the Government National Mortgage Association (commonly known as “Ginnie Mae”).
Mortgage banks strictly operate under banking laws, as applicable in that state. The banks put-up their mortgage loans for sale in a secondary market to enhance their respective warehouse line of credit through the proceeds thus received. This process helps in keeping them functional as well as enables them to carry on their lending business practices in the future.
Mortgage Bank’s Primary Income Source
Primary Income Source
- Fees for Loan Origination
- Fees for Loan Servicing
Mortgage Brokers vs. Mortgage Bankers
Mortgage broker can only originate a loan on behalf of a reputable financial institution. With regard to full disclosure, the mortgage broker is obliged to disclose any and all additional fees that the customer is being charged, under applicable state and federal laws.
Alternatively, in terms of loan origination, mortgage bankers risk their own capital to fund loans. They are also not required to disclose the price at which they sell their mortgages.