David Saks: What is a Mortgage Banker ?

David Saks - Real Estate Broker - The Real Estate Mart of Tennessee, Inc. - 4040 North Watkins-Suite #4 - Memphis, Tennessee 38127 - Phone (901) 357-4663

What is a Mortgage Banker ?

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A mortgage banker is, and may actually be, a separate company completely unaffiliated with any other company, thing or any entity which is perceived or known or inferred to have its own distinct existence (living or nonliving) for the purpose of originating loans. :-)

This is a thing which, by the nature of it's own existence, needs to have enough of it's own capital to buy, sell and service the loans it makes.

This very fact alone is a determining factor as to whether or not investors in the secondary mortgage market will have anything to do with it (help me with this one, loan pros).

Also, because of this fact the mortgage banker usually has some kind of a connection with another source of money like a bank (duh), a credit union, an insurance company or maybe even Walmart or some other humongous retail store.

Mortgage Bankers work real closely with what we commonly refer to as the secondary mortgage market selling the loans it makes to investors or creating securities backed by the loans it makes called mortgage backed securities.

The mortgage bankers have the distinction of being able to fund and close the loans on their own and, at their discretion, hold on to them until they're sold off.

They can also buy loans from other sources and pool them with any of their own loans and sell them into the secondary mortgage market as well.

I could fill up library stacks with information about mortgage backed securities, or MBS for those interested in the technologistics of the trade.

When mortgage bankers buy loans from other lenders they generally do this through an entity they create called a wholesale division.

This gives the mortgage banker the opportunity to get their hands on loans at reasonable prices without having to shell out cash to an originator, and frees up the money they need to make more loans. Wow, who would have thought of that !

What else can you tell Active Rain about the Mortgage Banker?

What are your experiences either as a mortgage banker or an investor working closely with mortgage bankers?

 




David Saks



Time&Temp Memphis

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Comment balloon 8 commentsDavid Saks • May 26 2008 01:27AM

Comments

As a former Mortgage Banker and past president of the Orange County Association of Mortgage bankers, I can say that in some and many instances, they are not as completely un attached as you think.

Many Mortgage bankers have to get the loan pre-approved before they can fund it on their own line. No different than a regular mortgage broker.

Others make thei rown decisions and have to answer to no one

Posted by Brett Noel (Keller Williams) over 11 years ago

Good points to consider, Brett. When real estate loans are treated as investments, like stocks or bonds, the secondary market has a responsibility to smooth out local imbalances in the supply and demand for real estate financing, since the secondary market is national in it's scope. Don't you agree, Brett? Pre-approval make sense.

Posted by David Saks ((retired)) over 11 years ago

David,

The licensing determines whether a company is a mortgage banker or a mortgage broker. It really does not matter whether they fund their own loans or whether they have an inhouse underwriter or whether they sell directly to the secondary market or to an investor.

The state simply has broker and banker licenses, with different licensing requirements. These is no essential significant difference.

Now a company that has an underwriter and funds its own loans and sells directly to the secondary market will be a mortgage banker, not a broker. But to have a banker's license does not require that the company do all or any of the three, in practice, or on all loans.

Richard

 

Posted by Richard Byron Smith, NMLS #184479, Mortgage Loan Officer (Mortgage Loan Officer, Fairway Independent Mortgage Corporation NMLS #2289) over 11 years ago

Richard, investment strategy separates that which is perceived, known or inferred to have its own distinct existence apart from the other. The broker doesn't subscribe to this component. The banker does.

Posted by David Saks ((retired)) over 11 years ago

David,

I am not sure how to understand that reply, but I would like to.

Does it matter to you whether the loan officer works for a company that funds its own loans with prenegotiated investor purchase or a company that strictly acts as a broker.

The borrower receiving the exact same rate and all other terms being equal.

Richard

Posted by Richard Byron Smith, NMLS #184479, Mortgage Loan Officer (Mortgage Loan Officer, Fairway Independent Mortgage Corporation NMLS #2289) over 11 years ago

Richard, if investment strategy was perhaps a singular motive, even a mortgage backed security interest, I would subscribe to the lender controlling it's own funds. Such a lender exercises authoritative control or power over it's resources and can sell my loan. I would like to research this a bit more, however.

Otherwise I'd consider the dominion of comparative shopping and a company acting as a broker would satisfy some of these needs. A broker can't sell my loan, unless something has changed that I'm unaware of. A mortgage broker is just exactly that, a broker. And a mortgage broker is a lender that deals with other lenders as an intermediary, or broker, of the other lender's loans. As a broker, you have access to many different wholesale lenders, and it's the broker's responsibility to give the consumer or the borrower the wholesaler's price to which they have added fees, which include origination fees, discount points and other miscellaneous fees. I believe that it is also true that the wholesaler does not require the same maintenance costs, and subsequently would not have the same operating overhead of the mortgage broker which allows the wholesaler to discount their prices to a mortgage broker, so that a mortgage broker can add a fee and still be competitive with others in the same business competing for the loan

Regulation of brokers has tightened significantly, partly because of many stories about borrowers going to brokers who were promised loans that did not exist, and from mortgage brokers who collected nonrefundable application fees. In some cases, they include stories about mortgage brokers who didn't know enough about mortgage lending to process a loan correctly. I've read stories about mortgage brokers taking loan applications without knowing whether they would be able to place the loan or not, and then the same mortgage broker keeps this information from the borrower until the very last second when the mortgage broker has run out of every option available to service the loan. It's good business practice to check the broker out real, real thoroughly, exhaustively, before an application for a loan is made with them.

Even though a mortgage broker can offer you a wharehouse full of loan products, the nastiest of the lot could sink your ship.

Finally, if the borrower receives the same rate, as you suggested, then no apparent disparity is manifest.

Thanks for your comments.

Posted by David Saks ((retired)) over 11 years ago

David,

This has been a good thread. Certainly a relevant thread.

You are right that the nastiest of the loan products could have sunk a financial ship. Not so much any more, but certainly true in recent years.

The state guidelines, from 2001, have called for yield spread premium to be used to reduce consumer upfront costs, which in fact they do.

Yield spread premiums, when not abusive, enable brokers and bankers to stay open and give the borrower a choice of financing option.

The perspective is that the loan origination fee are 1% upfront, and anything else is just tacked on. The truth is that the most loan origination fees are closer to 2%, and the market has generally settled on a comfortable balance of 1% fee upfront and something close to 1% in premium.

Without the premium, for my average loan size around $100,000, the upfront cost would need to be more like 2 to 2.5%.

The new guidelines want to make this more transparent, but they tend to make it more confusing because of the different treatment between loans that are funded by the investor and loans that are sold to an investor.

To be fair, brokers have a good bit of buy back liability with loans that are brokered. Funded loans that are sold do have some risk associated with the time for the investor to purchase the closed loan, but sold loan price generally includes the interim interest.

The difference between a broker and a banker is only a difference in licensing. A banker or a broker can fund their own loans. A banker license is required I think to service a loan, but it is not required that a banker service any loan.

The problem is with abusive practices, that are hard to legislate against. Individual broker and banker originator licensing requirements will help, as will continuing education.

I actually started a thread intending to discuss these things in a public thread, but the post did not receive any comments.

http://www.activerain.com/blogsview/548292/Good-Faith-Estimates-and

Probably needed a better title.

Thanks,

Richard

 

Posted by Richard Byron Smith, NMLS #184479, Mortgage Loan Officer (Mortgage Loan Officer, Fairway Independent Mortgage Corporation NMLS #2289) over 11 years ago

Where does it state, anywhere in the regulations of commerce for the State of Tennessee, that the Yield Spread Premium must be used to reduce consumer upfront costs?

The Yield Spread Premium (YSP) is without a doubt the most misunderstood and highly profitable secret the mortgage industry has kept from the American mortgage consumer.

In many cases borrowers are simply told that their loans will have a certain interest rate, and they never understand that the interest rate is higher than it needs to be.

It makes sense that whoever is offering a higher rate is going to want to be paid upfront for bringing a higher rate of return to the table. After you run the numbers, you'll find out that you still make more money over the long run with the upfront cost of the yield spread premium and the higher rate than no upfront cost and a lower rate.

Is it true that some in the mortgage business did not want their customers to find out about the yield spread premium because it would betray the fact they earned that money by raising that rate? Raising the rate for no other reason than to increase their income is kind of sneaky. Right?

What about POC (stands for "Paid Outside of Closing"), meaning the lender is paying the broker his YPS dollars outside of closing...is that how yield spread premium is legally described? Broker compensation paid by the lender outside of closing? Is this why it doesn't show up in the Borrower Cost column, or somewhere along lines in the 800's on the GFE?

If the broker hadn't put the borrower in a higher rate than necessary, the lender wouldn't be rebating the broker in the first place. So, even though the lender is paying it at closing, wouldn't the borrower be paying it in the higher monthly payments they'll be making to the lender for the next 30 years?

Didn't NovaStar Financial, at one time the 2nd largest subprime lender, recently settle a lawsuit charging that the non-disclosure of broker-paid yield spread premium harmed 1,000s of Washington state home mortgage consumers?

I've heard that this is a way to compute the YSP, and maybe avoid it so some comparison shopping can be done. Since laws and fiqures are changing all the time this is just an example and may not be reliable. But let's give it a shot anyway. Maybe some savvy math gurus can spot me here:

First examine Fannie Mae Weekly Yield Data - This the Wholesale Market Rate, published weekly.

Then look at the Freddie Mac Primary Market Survey This is a survey of over 125 banks, brokers and mortgage companies who provide the rate and points data for that days locked commitments, the retail rate in the market that day as an average!

How do we do this?.

1. Get Freddie Mac retail rate and points for the week.

2. Get the Fannie Mae wholesale rate for the same week on the same product.

3. Subtract the wholesale rate from the retail rate to get the "rate spread".

4. Convert rate spread to Yield Spread Premium by multiplying rate spread by 4 to get the Yield Spread Premium.

5. Add Freddie average points to Yield Spread for a Total Yield Spread Premium as a percentage

6. Multiply Total Yield Spread Premium as a percentage of the loan amount to find the dollar amount of Yield Spread Premium.


For example, the Fannie Mae Yield for a miscellaneous week ending on the 30 Yr fixed loan was 5.52%. The same week, the Freddie Mac website reported an average retail price of 5.83% with .6 discount points being paid.

So by taking 5.83- 5.52 this equals a wholesale rate of .31% for the national lending scenario.

To translate this amount of rate spread into dollars of yield spread, we multiply .31% by 4 which is 1.24% of the loan amount...on a $100,000 that equals $1,240!

Hang on, we're not done. The Freddie Mac website also reported that consumers were also paying on average .6 in discount points as well, so we add 1.24 plus .6 for a total of 1.84% of your loan amount in additional compensation collected by your bank or broker over and above the origination fees quoted to to the borrower, and on a $100,000 that equals $1,840!

If you add 1% for an origination fee plus the 1.84% in total YSP above, this shows the borrower is paying 2.84% for their loan and that's pretty doggone close to 3%!

THE BORROWER IS PAYING 3% FOR THE MORTGAGE ! DOES THE BORROWER EVEN KNOW IT?

If the origination fee is closer to 2%, as you suggested, it bumps up to 4%!

Shazzam!!!! That sounds like 4k for 100k to me.

Posted by David Saks ((retired)) over 11 years ago

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