Mortgage lending involves both a primary mortgage market and a secondary mortgage market. In the primary mortgage market, lenders originate mortgage loans by lending funds to borrowers by a correspondent lender or a retail lender.
A real estate loan can be originated through:
- a retail lender. This is a lender (e.g., a bank, savings bank, credit union or mortgage lender) that interacts directly with the borrower and actually makes the loan. If the lender holds its loans, rather than selling them, it is called a portfolio lender. A retail lender can also offer loans as a wholesale lender through mortgage brokers.
- a correspondent lender. This is generally a smaller lender that takes applications and underwrites and funds loans, either with its own money or from a line of credit with a larger lender, and sells the loans to wholesale lenders immediately upon closing under previously agreed-upon terms.
- a wholesale lender through a mortgage broker. This is a mortgage investor that prices and funds loans applied for through mortgage brokers. After a mortgage broker processes an application, the wholesale lender has it underwritten and funded. After the loan is made, the wholesale lender will either service it (i.e., collect the loan payments from the borrower) or sell or assign servicing to another entity.
Mortgage Lender (Banker)
A mortgage lender, or mortgage banker, makes mortgage loans with its own funds through mortgage brokers, mortgage loan originators and loan processors, who obtain and process applications from borrowers.
A mortgage broker does not fund loans. In general terms, a mortgage broker can be defined as an individual or firm that, for or in expectation of compensation or gain, obtains application information from a prospective borrower and attempts to match the borrower with a lender who is willing to make a loan based on the borrower’s qualifications.
A mortgage broker can work with a few specific lenders or offer a borrower’s application to a number of lenders. He will enter into wholesale broker agreements with these lenders. These agreements may provide remedies for the lender if the borrower immediately defaults or is found to have committed fraud.
In table funding arrangements, a mortgage broker will originate, process, and close in his own name a loan underwritten and funded by a secondary lender, but will then assign the loan to the funding lender at the closing table A mortgage broker typically does not service the loans he originates.
Mortgage Loan Originators
The term “mortgage loan originator” is used differently throughout the country and in different statutes or regulations.
Under Regulation X of the Real Estate Settlement Procedures Act (RESPA), a mortgage loan originator is defined as any person who originates the loan, including a lender or mortgage broker; the term “mortgage broker” applies to a mortgage broker or an individual who transacts loans for the mortgage brokers.
Under the SAFE Act and most state laws, the term “mortgage loan originator” applies to an individual who takes a residential mortgage loan application and/or offers or negotiates terms of a residential mortgage loan on behalf of a mortgage lender or mortgage broker for compensation or gain; or who may also be licensed as a mortgage broker or mortgage lender, as an individual. Loan originators employed by depository institutions (e.g., banks) regulated by federal agencies must be registered with the NMLS. Those working for other lenders or mortgage brokers must be licensed by the state and registered with the NMLS. This mortgage loan originator takes or receives mortgage applications, assembles information, and prepares the paperwork and documentation necessary for obtaining a mortgage loan. In the process, he may interview the borrower to determine his needs and may counsel and prequalify the borrower. He works and communicates with loan processors, underwriters, title, escrow, and lenders to ensure that the loan is processed smoothly and closes on time.
After making a loan, a lender can:
- hold it and bear the risks until the entire debt is repaid.
- warehouse it, using it as collateral for loans the lender needs from other lenders.
- sell it to another lender or investor.
- use it to back securities sold to investors.
These activities occur in the secondary mortgage market. The secondary mortgage market is where mortgages may be sold individually or bundled with other mortgages with similar features into mortgage-backed securities and sold on the equity market. It is composed of investors and lenders that buy and sell real estate mortgages or guarantee loans from primary market lenders.
Major participants in the secondary mortgage market are three agencies created by Congress, the first two of which buy and sell loans, while the third only guarantees them:
- Federal National Mortgage Association (FNMA), or Fannie Mae, created in 1938
- Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac, created in 1970
- Government National Mortgage Association (GNMA), or Ginnie Mae, created in 1968
None of these entities makes loans directly to homebuyers or has any direct contact with the public. Instead, their function is to provide a source of funds for lenders in the primary mortgage market by buying and selling mortgage loans and offering securities backed by these loans. The issuance of these securities, which represent interests in pools of mortgages, is termed securitization.