Mortgage bankers are essentially “mortgage lenders” that originate and sell their loans in pools on the secondary market to investors such as Freddie Mac and Fannie Mae, along with private investors. If they are non-depository institutions, they finance the loans with warehouse lines of credit extended by other lenders, but quickly sell them off on the secondary market so they can originate new loans. Countrywide and Wells Fargo Home Mortgage are two are the largest examples, though much smaller operations also share this distinction.
Portfolio Mortgage Lenders
Portfolio mortgage lenders originate and fund their own loans, and may service them for the entire life of the loan. Because they typically offer deposit accounts to consumers, they are able to hold onto the loans they fund. They are also able to offer more flexibility in loan products and loan programs because they don’t need to adhere to the guidelines of secondary market buyers. That means unique program guidelines and special offerings that other banks can’t offer. Once their loans are serviced and paid for on time for at least a year, they are considered “seasoned” and can be sold on the secondary market more easily. Countrywide and Washington Mutual are examples of portfolio mortgage lenders.
Correspondent Mortgage Lenders
Correspondent mortgage lenders originate and fund loans in their own name, then sell them off to larger mortgage lenders, who in turn service them, or sell them on the secondary market. The loans can be underwritten by the correspondent mortgage lenders, but the loan programs are usually based on terms approved by the larger mortgage lender, or “sponsor”. Correspondents usually have a array of products from different sponsors, and act as an extension for those larger lenders. In other words, a small correspondent mortgage lender may resell Wells Fargo products and/or Countrywide products under their own name.
Direct Mortgage Lenders
A direct mortgage lender is simply a bank or lender that works directly with a homeowner, with no need for a middleman or broker. Mortgage bankers and portfolio lenders usually fall under this category if they have retail operations. Examples include Washington Mutual, Wells Fargo and Bank of America, though smaller entities could share this distinction as well.
Wholesale Mortgage Lenders
Wholesale mortgage lenders are similar to mortgage bankers in that they originate and service loans, and sell them on the secondary market. Most mortgage bankers have wholesale and retail divisions, although wholesale lenders can be independent entities as well.
A wholesale mortgage lender works with independent mortgage brokers and loan officers to originate loans. Brokers and loan officers work on the retail end with borrowers, and once they secure a deal, they send that deal to a wholesale mortgage lender for underwriting and processing. The wholesale mortgage lender will fund the loan, and usually sell it on the secondary market within a month or two.
Warehouse lenders provide financing to other mortgage lenders so they can originate their own mortgages. This short-term funding provides smaller lenders with liquidity so they can focus on making more mortgages while selling existing ones on the secondary market.
Smaller mortgage bankers and correspondent lenders rely on warehouse lines of credit to finance their operations. They pay back the warehouse lines of credit whens loans are sold, and may give a cut to the warehouse lender for each loan that is eventually sold. The mortgages are used as collateral for the temporary financing.
Subprime Mortgage Lenders
Subprime lenders tend to focus on homeowners with less than stellar credit. While the definition of subprime varies from lender to lender, most in the industry characterize it as lending to borrowers with credit scores below 620. But other issues may persist, including limited income and assets, or inability to provide documentation. As a result, interest rates provided by subprime mortgage lenders will be much higher than those at standard lenders. Essentially, subprime lenders are willing to take on more risk for a greater reward (a sky-high interest rate).
Alt-A Mortgage Lenders
Alt-A mortgage lenders typically offer mortgages to borrowers with limited documentation, limited or no down payment, and/or credit scores mostly between 620-720. This type of mortgage lender falls somewhere between a prime lender and a subprime lender. Borrowers may use an Alt-A mortgage lender because they have a tricky loan scenario or a sticking point that makes it difficult or impossible to close with a traditional mortgage lender. The risk appetite of an Alt-A lender is medium-high.
Mortgage brokers work independently with both banks/mortgage lenders and borrowers, and need to be licensed. Their job is to contact borrowers and bring in potential deals. Once they have a deal, they can send it to a mortgage bank or a wholesale lender. They need to process the loan once it is approved, and can negotiate pricing with the bank or mortgage lender to receive a rebate, known as a yield spread premium. Mortgage brokers may form partnerships with real estate agents to ensure a steady stream of new business.
Loan officers work under mortgage brokers, and basically do the same thing a broker would do, except they don’t need to be licensed. They solicit borrowers using direct mail, telemarketing, and similar practices. Brokers usually provide them with office supplies and leads, and each take a split of the total commission. They don’t need any experience, so take caution if and when one solicits you.
Related: Take a look at the top mortgage lenders in the second quarter of 2010.