Definition of a Mortgage Bank & Its Features
One of the key steps to buying a home is getting a mortgage loan that covers your costs and is within your ability to pay back. There are many sources of mortgage loans, some of which fall under the heading of mortgage banks. Mortgage banks originate loans and later sell them to secondary markets where investors take on the risk of a borrower defaulting, but also profit from interest payments.
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Function
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Mortgage banks use money they already have to make loans to homebuyers. They process loan applications and determine which borrowers qualify for loans, the proposed loan amount and the corresponding interest rate. Once the transaction is completed and the borrower moves into the home, the mortgage bank sells the loan into a secondary market. This means that mortgage banks don't actually service the loans they make; instead, they only own the loans when they are newly originated.
Funding
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Mortgage banks generally have three distinct sources of funding. The first is a large line of credit from one or more other lenders. Mortgage banks pay interest to borrow this money, and then lend it to homebuyers at a higher rate. To keep their credit limits high, mortgage banks need equity in the form of property the bank owns or cash reserves. The second source of funding is the money mortgage banks receive when they sell loans into secondary markets; bundles of loans become mortgage-backed securities that investment firms and private investors pay for the right to control. Finally, mortgage banks make money from the fees they charge borrowers during the process of closing on a home and setting up a mortgage loan.
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Missing Features
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Unlike some other types of mortgage lenders, mortgage banks do not accept deposits from customers or make other types of loans. This allows mortgage banks to function autonomously and without the same oversight that the government applies to commercial banks that accept money from depositors. However, some commercial banks work with or include mortgage banks. An example is Wells Fargo Home Mortgage, which is a mortgage bank owned by Wells Fargo & Company (which owns and manages other types of banks under the Wells Fargo name as well).
Alternatives
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Other types of mortgage lenders share similar features with mortgage banks but operate somewhat differently. For example, portfolio mortgage lenders also originate their own loans but they manage the loans themselves, funding loans with deposits from investors. Portfolio mortgage lenders and mortgage banks together are called direct lenders, which refers to any lender that works directly with homebuyers. The alternative to a direct lender is a broker, who presents borrowers with loan options from multiple lenders and charges a commission for negotiating and setting up the loan.
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