Mortgage Companies

Role of mortgage companies in housing market

The term mortgage companies is generally used in a loose manner. There are two types of mortgage companies. One is the mortgage lender and the other is the mortgage broker. The lender provides the mortgage loan to the borrower, taking the property under lien, with the stipulation that a fixed amount is repaid every month over a period.

The loan amount, the type of interest and its rate, and the period of repayment are determined by mutual consent of the lender and borrower, taking into consideration the repayment capacity and credit rating of the borrower.

On the other hand, mortgage brokers do not lend any money directly. They simply offer the various loan products of different lenders. Normally, real estate brokers act as mortgage brokers. They charge a specific fee for their services.

Their counseling normally includes providing information about the various mortgage schemes and in assisting the compilation of necessary mortgage documents like title deed, property appraisal certificate, income certificate, assets and liabilities statement, credit rating report, etc. A real estate broker, who is a member of the National Association of Realtors in the United States, is called a realtor. It is always better to deal with such accredited realtors, while planning for a mortgage loan.

If the lenders conduct all the mortgage loan formalities themselves, they are known as ‘retail lenders.’ If the lenders take the assistance of mortgage brokers, then the lenders are termed ‘wholesale lenders.’ Most of the large lenders have both wholesale and retail mortgage divisions.

The functions of wholesale lenders, retail lenders, and mortgage brokers could be classified as under.

Activities of wholesale lenders

Lock the terms of mortgage loan

Underwriting the mortgage loan

Finalize the mortgage and fund the loan

Functions of retail lenders

1. Search for clients and counsel them
2. Invite mortgage loan application
    
   Lock the terms of mortgage loan
3. Process the mortgage loan
4. Underwriting the mortgage loan
5. Finalize the mortgage and fund the loan

Services of mortgage brokers

1. Search for clients and counsel them
2. Accept mortgage loan application
3. Process the mortgage loan
4. Assist in compilation of necessary documents

Another category of professionals in mortgage companies is called loan officers. They are normally in the employment of mortgage brokers. Such loan officers normally search for and find customers. They counsel their clients, accept mortgage applications, and process the mortgage loan, helping the clients in compiling the necessary documents. If the mortgage company is operated by a single person as the broker, then that person himself is both the broker and the loan officer. Loan officers normally work on a commission basis ranging from ½% to 1% of the mortgage loan amount, though some of them might also have a monthly salary apart from the commission. Sometimes, loan officers resort to a technique known as ‘overage’ by increasing the posted mortgage loan price. They usually get a portion of the ‘overage’ that they had created. Loan officers also possess a limited discretion to reduce the posted mortgage price, in case they have to resort to such reduction to beat competition.

Approaching a mortgage broker is advisable because they normally have contact with several lenders and would be able to provide several mortgage options. Due to their continuing relationship with such lenders, they would also be in a better position to bargain and obtain better terms. They would be able to help people with poor credit ratings by finding lenders who fund such people. However, the service charges of mortgage brokers are significant, usually in the range of 6% to 7.5%. One risk in dealing with mortgage brokers is that an unscrupulous mortgage broker might increase the posted price to take advantage of the ‘overage’ and benefit by that. One has to be vary of such persons. It would be better if thorough inquiry is made at the beginning itself about several mortgage brokers to weed out such persons. Direct lenders normally do not indulge in ‘overage.’ Reputed and accredited mortgage brokers also do not resort to such practices.

There are two categories of lenders operating in the United State real estate market. They are known as mortgage bankers and portfolio lenders. Mortgage bankers operate with limited funds and sell their loans in the secondary market to raise further funds. They either borrow from banks or sell short-term notes to lend the mortgage loans. Later, they repay the banks or repurchase the short-term notes by selling the mortgage loans in the secondary market. In the United States, 9 out of 10 lenders are mortgage bankers and only one is a portfolio lender. Portfolio lenders consist of commercial banks, credit unions, and savings & loan associations. Invariably, mortgage banks provide better terms on fixed interest rate mortgage loans, while portfolio lenders offer better terms on adjustable rate mortgages. However, this is only a very general rule, because of the flexibility in the operations of both the categories of lenders.