Q Can you explain the difference between a mortgage lender and a mortgage broker? I also see some other companies that advertise that they loan money for real estate, but they are not banks. – H.B., Lynnwood
A As your letter points out, there are many players in the mortgage industry today, ranging from wealthy individuals loaning out their own money to nationwide corporations loaning billions of dollars each month.
Twenty or 30 years ago, the mortgage market was far less complicated. When you wanted money to buy a home, you simply went to your local bank, it loaned you the money and you paid it back. Today, mortgages are a commodity. They are bought and sold like stocks and bonds. Your mortgage interest rate is more dependent on the bond traders on Wall Street than the bankers on Main Street. In the past two decades, mortgage brokers and mortgage bankers have come out of nowhere to overtake banks as the primary source of mortgage loans in this country. Banks are still important players, but they now originate less than 40 percent of all residential mortgages.
So what’s the difference between a bank, a mortgage banker and a mortgage broker?
A bank is a federal or state regulated institution with deposits insured by the federal government. Some banks make mortgage loans through their local branches, while others own separate subsidiary mortgage companies. A few banks still keep their mortgages in their own investment portfolio, which means that you can still make your mortgage payment at the local branch just like in the old days. But the vast majority of banks sell their mortgages in the secondary market through agencies such as Fannie Mae, the Federal National Mortgage Association.
Mortgage bankers are not savings institutions like a traditional bank. They are large companies that make mortgages by loaning money from their multi-million dollar credit lines. The mortgages are quickly packaged and sold in the secondary market so that the mortgage banker can free up their credit line to make more new loans.
Mortgage brokers are independent companies that offer access to a wide range of loan products offered by banks and mortgage bankers. Brokers essentially act as a retail branch for the lenders they represent. Brokers get their money at “wholesale” rates that are unavailable to the general public, then they add their profit margin and offer loans to the public. By eliminating the overhead expense of maintaining a vast web of retail branches, large national mortgage bankers are able to deliver home loans through mortgage brokers much more efficiently and less expensively than commercial banks, which is why mortgage brokers have taken such a big slice of the home loan pie over the past 15 years.
So which is better – a bank, a mortgage banker or a mortgage broker? As a mortgage broker myself, I’m prejudiced in favor of brokers because we have a wider range of loan products from which to choose than do banks or mortgage bankers. But the fact is, most borrowers can be well served by any of the three types of mortgage lenders.
In my opinion, selecting the right loan officer is much more important than selecting the right mortgage company. There are lousy loan officers at great banks and mortgage companies just as there are great loan officers at lousy lenders. The mortgage industry is a people business built on trust. When you meet a loan officer, ask yourself if he or she seems knowledgeable about the loan products and the application approval process. Do they take time to answer all your questions, or do you feel like you are being rushed and sold a loan? Do you feel confident that he or she will deliver on his or her promises? More often than not, mortgage difficulties are the result of ignorance and incompetence rather than outright fraud and deception.
It’s a good idea to compare interest rates to make sure you are getting a competitive quote, but beware of falling for “bait and switch” artists. Some unscrupulous loan officers deliberately under quote the market to get you to commit to working with them – then they spring their real rates on you when it’s too late to back out of the loan. One way to sniff out such tactics is to tell the loan officer that you want to lock the interest rate being quoted over the phone right now, and you want a written guarantee that the closing costs quoted over the phone will not be exceeded by even one dollar. I recently had one of my mortgage clients use this technique on a competitor who claimed to be offering a loan program for $1,000 less in closing costs than we were charging.
When my client asked them to lock the rate and guarantee the fees, they quickly retreated and said they couldn’t afford to close a loan for that amount of money. The moral of this story is, some loan officers will tell you one thing over the phone, but it’s another story once you’re in their office. Use your common sense. If it sounds too good to be true, it probably is.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box 930, Everett, WA 98206. Fax questions to Tytler at 425-339-3435, or e-mail him at economy@heraldnet.com
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