Home Equity Loan
Mortgage Broker
A mortgage broker acts as an intermediary who sources mortgages on behalf of
individuals or businesses.
Traditionally, banks and other lending institutions have distributed their own
products. However as markets for mortgages have become more competitive the role
of the mortgage broker has become more popular. Today in most developed mortgage
markets (especially the US, UK, Australia, Spain and Canada) mortgage brokers
are the largest distributors of mortgage products for lenders.
Most mortgage brokers are regulated to some degree to ensure a level of consumer
protection. The extent of the regulation depends on the jurisdiction.
Why use a mortgage broker?
In competitive mortgage markets many lenders use an array of rate offers and
other incentives to attract customers. To many consumers due to their infrequent
purchases of mortgage products the mortgage market may appear confusing and
somewhat daunting. A mortgage broker can guide them through the process of
selecting a suitable mortgage and offer mortgage and property related financial
advice.
For borrowers with poor credit records or other unusual circumstances finding a
lender may be difficult and therefore it may be necessary for them to consult a
mortgage broker as they will have the specialised knowledge required.
Tasks of mortgage broker
The nature and scope of a mortgage brokers activities varies with jurisdiction.
For example in the UK anyone offering mortgage brokerage is offering a regulated
financial activity; the broker is responsible for ensuring the advice is
appropriate for the borrowers circumstances and is held financially liable if
the advice is later shown to be defective. In other jurisdictions the
transaction undertaken by the broker may be limited to pointing the borrower in
the direction of an appropriate lender and no advice given.
Therefore the work undertaken by the broker will depend on the depth of their
service and liabilities. Typically the following tasks are undertaken:
(a)
Marketing to attract clients
(b)
Assessment of the borrowers circumstances. This may include assessment of credit
history, affordability (verified by documentation or otherwise).
(c)
Assessing the market to find a mortgage product that fits the clients needs.
(d)
Applying for a lenders agreement in principle (pre-approval)
(e)
Gathering all needed documents (paystubs/payslips, bank statements, etc.),
(f)
Completing a lender application form.
(g)
Explaining the legal disclosures.
(h)
Submitting all material to the lender.
Mortgage brokerage in the USA
Over 80% of home loans issued in the US today are negotiated by brokers. The
banks have used brokers to effectively outsource the job of finding and
qualifying borrowers, and also to outsource some of the liabilities for fraud
and foreclosure onto the originators through legal agreements.
During the process of loan origination, the broker gathers and processes
paperwork associated with mortgaging real estate.
As of 2005, there are approximately 20,000 mortgage brokerage operations across
the USA. Today, mortgage brokers originate 60% of American mortgages.
Difference between a mortgage broker and a loan officer
A loan officer acts as the conduit between buyer and lender. Most states require
the mortgage broker to be licensed, while others do not. States regulate lending
practise and licensing, but the rules vary. Most have a license for those who
wish to be a "Broker Associate", a "Brokerage Business", and a "Direct Lender".
A mortgage broker is normally registered with the state, and personally liable
(punishable by revocation or prison) for fraud for the life of a loan. A loan
officer is typically not liable for their actions, and work under the umbrella
license of the institution they are at. Typically, they have less experience in
the field.
Also, loan officer usually connotes someone who works for a lender, and has
involvement in the internal processes of a lender. A broker exclusively uses the
money of others to fund their loans.
Competitiveness in the mortgage banking and brokering industry
A large segment of the mortgage finance industry is commission based. Potential
clients can compare a lender's loan terms to those of others through
advertisements or internet quotes.
In the 1970's, mortgage brokers did not have access to the wholesale markets
like the traditional bankers had. Today, mortgage brokers are more competitive
with their access to wholesale capital markets and pricing discounts. A mortgage
broker has lower overhead costs compared to large and expensive banking
operations because of their small strucuture. They can lower rates instantly to
compete for clients. On the other hand, larger companies are less competitive
since they provide their sales representatives their fixed rate sheets. The loan
officer oftentimes cannot reduce their companies profit margin and may be higher
or lower than the marketplace, depending on the decision of managers. Thus,
mortgage brokers have gained between 60-70% of the marketplace.
Mortgage brokers can obtain loan approvals from the largest secondary wholesale
market lenders in the country. For example, Fannie Mae may issue a loan approval
to a client through its mortgage broker, which can then be assigned to any of a
number of mortgage bankers on the approved list. The broker will often compare
rates for that day. The broker will then assign the loan to a designated
lisenced lender based on their pricing and closing speed. The lender may close
the loan and service the loan. They may either fund it permanently or
temporarily with a warehouse line of credit prior to selling it into a larger
lending pool. The only difference between the "Broker" and "Banker" is often the
banker's ability to use a short term credit line (known as a warehouse line) to
fund the loan until they can sell the loan to the secondary market. Then, they
repay their warehouse lender and obtain a profit on the sale of the loan. The
borrower will often get a letter notifying them their lender has sold or
transferred the loan.
Sometimes they will sell the loan, but continue to service the loan. Other
times, the lender will maintain ownership and sell the rights to service the
loan to an outside mortgage service bureau.
The majority of lenders act as brokers
A lender is usually a savings bank, commercial bank, or mortgage banker with the
legal right to fund a mortgage loan. They must demonstrate a minimum credit line
sufficient to fund mortgage loans until those are sold to a large servicer. Few
fund loans permanently. You should inquire about the rate of loans transferred
and to where, before before applying for a mortgage with a particular lender. In
New York it is required that lenders who are licenced to make a loan (but intend
to sell it) disclose to clients the percentage of loans sold in prior years. It
may state that the amount is between 75% and 100% or it may be less.
The secondary market influences banker and broker loan programs
Even large companies with a lending licence, sell, or broker the mortgage loan
transactions they originate and close. A smaller percentage of bankers service
and keep their loans than those in past decades. Banks act as a lender due to
the increasing size of the loans because few can use depositor's money on
mortgage loans. A depositor may request their money back and the lender would
need large reserves to refund that money on request. Mortgage bankers do not
take deposits and do not find it practical to make loans without a wholesaler in
place to purchase them. The required cash of a mortgage banker is only $50,000
in New York. The remainder may be in the form of property assets (an additional
$200,000), and an additional credit line from another source (an additional
$1,000,000). That amount is sufficient to make only two median price home loans.
Therefore, mortgage lending is dependent on the secondary market, which includes
securitization on Wall Street and other large funds.
The top wholesale institutions are Federal National Mortgage Association, and
the Federal Home Loan Mortgage Corporation, commonly referred to as Fannie Mae
and Freddie Mac, respectively. Loans must comply with their jointly derived
standard application form guidelines so they may become eligible for sale to
larger loan servicers or investors. These larger investors could then sell them
to Fannie Mae or Freddie Mac to replenish warehouse funds. The goal is to
package loan portfolios in conformance with the secondary market to maintain the
ability to sell loans for capital. If interest rates drop and the portfolio has
a higher average interest rate, the banker can sell the loans at a larger profit
based on the difference in the current market rate. Some large lenders will hold
their loans until such a gain is possible.
The selling of mortgage loans in the wholesale or secondary market is more
common. They provide permanent capital to the borrowers. A "direct lender" may
lend directly to a borrower, but can have the loan pre-sold prior to the
closing.
Few lenders are comprehensive. That is, few close, keep, and service the
mortgage loan. The term is known as portfolio lending, indicating that a loan
has been made from funds on deposit or a trust. That type of direct lending is
uncommon, and has been declining in usage.
Improved consumer laws
The laws have improved considerable in favor of consumers. A mortgage broker
must comply to standards set by law in order to charge a fee to a borrower. The
fees must meet an additional threshold, that the combined rate and costs may not
exceed a lower percentage, without being deemed a "High Cost Mortgage". An
excess would trigger additional disclosures and warnings of risk to a borrower.
Further, the mortgage broker would have to be more compliant with regulators.
Costs are likely lower due to this regulation.
Mortgage bankers and banks are not subject to this cost reduction act. Because
the selling of loans generates most lender fees, servicing the total in most
cases exceeds the high cost act. Whereas mortgage brokers now must reduce their
fees, a licenced lender is unaffected by the second portion of fee generation.
This is due to the delay of selling the servicing until after closing.
Therefore, it is considered a secondary market transaction and not subject to
the same regulation.
Consumers can avoid the high interest rates by utilizing a broker who cannot
benefit beyond a set amount.
Mortgage brokerage in Canada
The laws governing mortgage brokerage in Canada are determined by provincial
governments. Throughout Canada, high ratio loans are insured by either the
Canada Mortgage and Housing Corporation or Genworth Financial.
Quebec is unique in all of North America as its laws are based on the Civil
Code. The law permits mortgage brokerage to be performed by those in the finance
industry, as well as those in the real estate industry.