Where Does The Mortgage Money Come From?
In much more simple times, applying for a home loan was a very different process. Essentially all you had to do was go down to your local bank, speak with the branch manager and, if they had the money and thought you were a reasonable credit risk, they would give you the loan.
Things a little different nowadays. There has been too much fraud and too many small banks have shut down leaving chaos in their wake. Also, folks have realized that capital consolidation is a lucrative business.
Loan Institutions
Now you will most likely be dealing with one of the three major loan institutions in the United States. They are:
· Fannie Mae (FNMA - Federal National Mortgage Association)
· Freddie Mac (FHLMC - Federal Home Loan Mortgage Corporation)
Ginnie Mae (GNMA - Government National Mortgage Association)
This is where the money for your home loan comes from.
You can then walk into any home loan office and inquire about obtaining a home loan. Then they will start working for you. They will do all of the processing, and all of the verifications, and if everything is kosher they will give you the money you need to buy a home.
Of course your loan process rarely ends there. In most cases the company that approves your loan won't be the company that takes your monthly payment. The company that originated the loan will most likely outsource the payments to another firm.
This company is often call led the loan 'servicer' for your mortgage. They are simply servicing your loan for another institution. Companies do this to save money. Often lenders will specialize to save costs and a specialist who is familiar with your type of loan will service your loan.
This is also a great way for those loan 'service' companies to make some extra money. What they do is they package your loan in with the loans of all other people in a similar situation and then it is sold off to one of the three institutions listed above.
The institution then gives the servicer of the loan a service fee, which is usually only about 2%. However, all of this adds up due to the large volume of loans they can process due to their specialization. Two percent of a billion dollars is a lot of money.
You may think that this is simply another middleman that is driving up prices and gouging consumers. In fact, it is quite the opposite. Because these servicers make service fee from the big three institutions they want as many mortgages under their belt as possible for the services fees. In order to attract your business they may even give you a loan that they loose money on, knowing that they will recoup their loses after selling it to one of the big three.
This is the cycle and this is how mortgages make money.
However, things can be a little more complicated than that, and it is a good idea to know the different types of lenders so when you do undertake the procedure you aren't in the dark.
Mortgage Bankers
A true mortgage banker is a lender that has the size and clout to deliver large pools of loans to the three big institutions (these are also called jumbo loan investors).
Any company that can do this is called a mortgage banker. These can be just about any size. Some if these lenders will also service the loans themselves, but as was mentioned before others will send them out to a separate servicer. Most true mortgage bankers will have a wholesale lending division.
The two largest mortgage bankers in the United States are Countrywide Home Loans and Wells Fargo Mortgage. Beware though, because of the prestige involved, some companies will call themselves mortgage bankers but this is often just a marketing ploy.
Mortgage Brokers
A mortgage broker is a company that does the originating of loans. These are the people that you develop your personal relationship with. They often have an established relationship with the lending institutions. Mortgage brokers also tend to be correspondents, which is why they may claim to be mortgage bankers, but again this is often just for marketing purposes.
Wholesale Lenders
Many mortgage brokers and some portfolio lenders have the dual position as wholesale lenders who cater to some mortgage brokers for loan origination. IN fact some wholesale lenders do not even have their own retail branches, Thus getting all of their income from different mortgage brokers for their loans.
In most cases this does not affect you as a consumer at all. You still get your loan money at the same price. The only difference is that these wholesale loan divisions can offer mortgages at a lower cost (due to volume) . Of course you do not see any of this savings because there is that fee that nullifies any discount offered by the wholesaler.
Which Lender Is Best For You?
When you ask your loan officer who is the best there is 90% chance that they will suggest that the lender they work for is the best. Naturally, they are not going to bite the hand that feeds them, and they'll give you a laundry list to this effect.
Naturally realtors, who want the deal to go as smoothly as possible have a different opinion. They will give you great advice on the issue because it is in there interest.
In the past a realtor may have mentioned the portfolio lender as providing the best deal, because they had the highest probability of turning over your loan. However, as capital consolidation has become an increasingly popular way to make money, the prestige and professionalism of mortgage bankers and mortgage brokers has increased.
So you really have three very good options (even though your money will probably end up coming from the same place anyway).
If are still not convinced of any, try asking the realtor to suggest a good loan officer who can give you some more details and let you know exactly what you will be able to get. Plus, the realtor probably knows the loan officer and chances are they have a good relationship based on passed success.
Loan Officer
As was mentioned before, you money is probably going to come from the same place no matter what. All you really care about is getting a great price. Most loan officers are good honest people so find someone that you feel you can trust.
After all, they have two very important jobs, they have to seek out quality loans and they have to help you get one approved. Without these two factors your home buying experience could be a sour one.
As for the lending institution the only thing you can really go on is their reputation, which they hold dearly. If you have heard bad things about one institution keep that in mind and make sure to watch out for warning signs.
