MORTBANKER

Villa Rose Associates Ltd.

FOR IMMEDIATE RELEASE

WHAT IS A MORTGAGE BANKER?

The mortgage banking industry today is one of the fastest growing and most important sources of mortgage credit in this country. Mortgage bankers account for more than one-third of all residential mortgage loan origination's, making them the second largest source of home mortgages, and a significant portion of financing for commercial properties. Yet few people understand what mortgage banking is or what mortgage bankers do.

Mortgage Banking

Mortgage banking is the origination, sale and servicing of mortgages, secured by either residential or income producing real estate. The term itself is somewhat misleading in that it implies that the mortgage banker is a depository institution. While some mortgage companies may be subsidiaries of such institutions - or more likely of their holding companies - unlike banks and savings associations, they do not receive money from individual depositors. Instead, the mortgage banker serves as a middleman, arranging loans and then selling them to other lenders and investors both within the United States and abroad.

With residential real estate, the process begins with the mortgage banker using short-term borrowings to make mortgage loans to home buyers. These loans are then grouped together for sale in packages to outside investors, usually large institutions. The proceeds of the sale are used to replenish the lending capital, and start the cycle over again. Even after the loans are sold, however, the mortgage banker remains in the picture as the servicer of the loan. Servicing consists of collecting the monthly payments, forwarding the proceeds to investors who have purchased the loans, maintaining escrow accounts as the investors' representative if any problems arise with the loans.

Although mortgage companies can be found throughout the United States, a majority are located in traditional capital deficit areas such as the South and West. This is because traditionally the mortgage banker served as an "importer" of money, bringing investment money in from capital-rich areas. Today, however the mortgage banker is more a facilitator than a balancer, shopping national money markets for capital and providing it to all areas of the country, even when other types of lenders have exhausted their supply of funds for mortgages.

The Secondary Market

Mortgage bankers also operate in what is known as the secondary market, as opposed to the primary market where loans are originated. The secondary market is where pools of residential loans are sold and re-sold after origination (income property loans, because each is unique, do not lend themselves as easily to pooling for sale in the secondary market; instead, they are arranged and placed on a loan by loan basis). The secondary market has become extremely sophisticated one, involving a variety of participants, including savings and loan associations, commercial and mutual savings banks, life insurance companies, pension funds, and institutions such as the Federal National Mortgage Association ("Fannie Mae"), the Government National Mortgage Association ("Ginnie Mae"), and the Federal Home Loan Mortgage Corporation ("Freddie Mac").

Fannie Mae, originally a government corporation, became a private corporation in 1968. It is the nation's largest investor in residential mortgages. Mortgage bankers have consistently been FNMA's biggest customers, selling large numbers of loans insured by the Federal Housing Administration (FHA) or guaranteed by the Veterans Administration (VA), as well as conventional loans, i.e., those privately insured or uninsured. In addition, Fannie Mae issues securities backed by conventional and seasoned FHA and VA loans from its own portfolio as well as loans pooled by lenders.

Ginnie Mae, an agency within the U.S. Department of Housing and Urban Development, acts as a guarantor of mortgage-backed securities issued by mortgage bankers. Over $400 billion in GNMA securities, backed by pools of FHA and VA mortgages, have been issued to date. Because the U.S. Government guarantees repayment to investors, these "Ginnie Maes" enable mortgages made to ordinary households to compete with large corporations for financing in the bond market.

Freddie Mac, created by the Congress in 1970, serves as a secondary market primarily for conventional loans. The Mortgage Corporation, as it is also called, purchases loans from originators, pools them into securities, and then sells the securities to financial institutions and other investors who would traditionally buy bonds.

Thus, the secondary markets bring in more money for mortgage loans.

Avenues of Mortgage Finance

There are three basic mortgages to choose from in financing a home: a conventional mortgage, and FHA-insured mortgage, and a VA-guaranteed mortgage.

Most single-family mortgages originated by mortgage bankers are insured by the Federal Housing Administration. The reverse also is true - more than 80 percent of all FHA and VA mortgages are made through mortgage bankers. A substantial portion of FHA and VA loans, as well as some of the conventional loans originated by mortgage bankers, are sold through investment bankers using various types of mortgage-backed securities. In recent years, mortgage bankers have become more heavily involved with conventional loans (most of which are privately insured), a trend that can be expected to continue.

Until about fifteen years ago, most mortgages (conventional, FHA, and VA) were about the same. You got a fixed rate for a fixed term and paid the loan off. Today however, there are many different type of loans to choose from, including fixed-rate mortgages, adjustable-rate mortgages (ARMs), and variations on each. To keep pace with the times, lenders now offer fixed-rate loans that you can pay every two weeks ("bi-weekly" mortgages), loans that are adjustable for a time that can be converted to fixed-rate loans (Convertible ARMs), and others. Consumers can best learn about what mortgages are available to them by checking with their local lenders and or the newspapers.

Loan Origination

Origination is the process by which a mortgage lender creates a mortgage secured by real property. On home loans, the mortgage banker :originates: mortgages with funds from a variety of sources. Most often, the lender uses short-term borrowings from commercial banks, commonly known as "warehousing lines," to "close" the transaction.

The origination process includes not only finding an investor for a borrower, but also preparing the loan documents to fit both the borrower's and the investor's requirements. The mortgage banker has the property evaluated by an appraiser. He negotiates loan terms, submits the loan application and appraisal to the investor, and records or documents the transaction in accordance with local laws in order to protect the borrower.

In the case of an insured or guaranteed loan, the mortgage banker serves as an intermediary between the parties buying and selling the home, and FHA or VA. The mortgage banker handles the funding of the loan and, after the buyer and seller have closed the transaction, conveys the loan to the investor. An origination fee is paid by the borrower to help cover part of the lender's cost of origination.

Income Property Financing

Mortgage banking also plays a vital role in the field of income property finance. It involves the origination of investments secured by income producing real estate: shopping centers, office buildings, apartment houses, industrial properties, etc. While less noticeable to the public than single-family activity, it nonetheless accounts for billions of dollars in new construction or refinancing of existing mortgages.

The mortgage banker acts as the representative of the developer or owner of the property for the purpose of obtaining a loan to purchase property, to build real estate, or to refinance property that has already been built. The mortgage banker often acts as well as a representative (called a "correspondent") of one or more financial institutions which are seeking income property mortgage applications.

The developer or owner reviews with the mortgage banker the current and potential value of the property. An important aspect of property is the income it will earn as compared to the expenses incurred to operate the property and pay the real estate taxes. Estimating how much income will remain after operating expenses and property taxes will determine how much money is available to make the payments on the mortgage.

The mortgage banker keeps the borrower informed about the mortgage market. What are the current interest rates for different terms (length of mortgage)? What, if any, are the prepayment restrictions? Are variable-rate mortgages available as well as fixed-rate mortgages? Would it be in the borrower's interest to obtain more money or lower interest rate in return for sharing the profits with the lender after the debt service is paid?

The mortgage banker must know exactly what format the loan application should be, and how lenders' requirements differ. Those mortgage bankers who serve as correspondents attempt to furnish sound commercial loan obligations to their investors on a regular basis.

To be a successful negotiator of income property investments, the mortgage banker must be familiar with a variety of appraisal and income estimating techniques - including the different measures used for different types of property - and local market and real estate conditions as they may affect values.

Servicing

After originating a loans, the mortgage banker will traditionally begin to service or administer the loan and its problems for the life of the mortgage on behalf of the investor. With expertise in financing, knowledge of the local real estate market, and operating efficiency, the mortgage banker provides the trained staff and facilities to service these loans at a lower cost to investors than they could achieve through direct investment and servicing on their own in unfamiliar regions.

On residential loans, the basic monthly payment collected from the home buyer consists of two parts - principal and interest. Payments of principal go toward reducing the debt, or balance owed on the loan amount. On standard fixed-rate, fixed-term mortgages, the interest portion, based in the declining balance owed, constantly grows smaller, both in amount and as a percentage of the basic payment. (It is all or a portion of this interest that provides the home buyer with a deduction on his or her federal income tax.) If the loan is insured by a private mortgage insurer, a monthly insurance premium will also be part of the fixed monthly payment. This fee, too, is a percentage of the declining balance. (The variety of new alternative mortgage instruments mentioned earlier generates a host of loans amortization schedules to complex to discuss here).

The amounts collected each month for hazard insurance premiums and taxes are maintained in a special account, usually called and "escrow" account. The mortgage banker has custody of the escrow until the tax and insurance payments are actually paid by him or her. It is the responsibility of the mortgage banker to pay taxes and insurance premiums on a timely basis. As a part of this collection function, the mortgage banker reports to the home buyer at the start of each year what portion of his or her payments for the previous year was applied to principal, interest, taxes, and insurance. As part of an annual escrow analysis, the mortgage banker also determines whether an adjustment in payments by the borrower is needed to meet anticipated changes in insurance premiums and taxes for the next 12 months.

It is the mortgage banker's responsibility to make sure the loan remains current - to see that regular monthly payments are made on time, according to terms of the mortgage contract. If, however, the homeowner become delinquent in making payments, it is the mortgage banker's obligation to counsel and assist the homeowner in order to cure the delinquency. A "forbearance," or deferral of principal and interest payments, may be extended in an effort to help the borrower work out his or her difficulties. If, however, the loan becomes seriously in default, foreclosure may be necessary in order to protect the investor's interest in the property and as a means of salvaging the borrower's equity, if any.

For multifamily housing and commercial loans, the servicing obligations involve not only collecting and forwarding the payments of principal and interest, but also keeping informed about the property. The mortgage banker makes occasional inspections of the property and keeps track of the leasing situation. If there are danger signs, such as departure of major tenant, the mortgage banker may alert the investor. If the mortgages goes into default, the mortgage banker has the initial responsibility of determining the cause and making a recommendation to the investor. Not all income property loans are serviced by mortgage bankers; many investors service the loan directly from their own offices.

Fees

Servicing and origination fees account for a large part of the mortgage company's income. In order to protect against price fluctuations in the package of mortgages being prepared and assembled for sale to an investor, a mortgage banking company typically obtains and advance commitment from the investor in the form of an agreement to purchase a given volume of loans at a certain price. In turn, the mortgage banking firms makes a commitment to its customers (builders, real estate brokers, or individuals) to pay out their loans at a firm price when the sale is completed. Oftentimes, points - each one is one percent of the mortgage - are paid at the time the loan is closes by the borrower and seller to provide a satisfactory return to the investor when the actual interest rate is below the yield committed for delivery.

In income property finance, the mortgage banker receives a loan placement fee from the borrower for obtaining a specific loan commitment on pre-agreed upon terms within a specific period of time. If the mortgage banker fails to produce such a commitment, the prospective borrower is not obligated to pay any fee. For this reason, the mortgage banking firms must be confident that the financing it recommends to a lender meets that lender's criteria.

Impact on Community Growth

Thus, through specialized service and knowledge, the mortgage banker plays a role in the community's economic growth and tax base by attracting funds from large institutions located in the financial capitals throughout the country. Very few communities have sufficient local capital to meet the mortgage credit demands of their population. Without the mortgage banker, the growth of such areas would unquestionably be slowed down.

Mortgage Bankers Association of America

Headquartered in Washington, D.C. the Mortgage Bankers Association of America (MBA) is the only nationwide organization devoted exclusively to the field of mortgage and real estate finance. Founded in 1914 as the Farm Mortgage Bankers Association, MBA today represents more than 2,800 member firms and corporations. Mortgage companies comprise the largest single group of members. Commercial banks, savings and loan associations, mutual savings banks, life insurance companies, and other bussines related to real estate finance also are represented in MBA.

Alhough they have no direct affiliation with the national association, there are some 100 mortgage banking associations providing services for their members at the state and local level.

For information in the many educational programs and other publications available from the Mortgage Bankers Association of America, write the MBA at 1125 Fifteenth Street, N.W. Washington, D.C. 20005-2766 or call (202) 861-6500

Mortgage Bankers Association of America

Published by the Mortgage Bankers Association of America

1125 Fifteenth Street, N.W., Washington, D.C. 20005-2766

Pubished here with permission.

This material is not intended to replace specific advice for your situation. You are advised to discuss your situation with a qualified attorney, tax advisor, financial advisor, or insurance agent. The rules are quite complex and we did not intend to over-simplify these complicated rules. Our intention was to familiarize you the the concepts and vocabulary so that you may have an informed discussion with a qualified professional.