Residential Mortgage Lending: Principles and Practices, 6e Chapter 4 THE MORTGAGE LENDERS

Objectives After completing this chapter, you should be able to: Explain which mortgage lenders are most important in residential mortgage lending as originators and which are investors. Explain how actions taken by the federal government aided in the development of the various residential mortgage lenders. Identify the sources of funds for each of the lenders. Compare and contrast the activities and investment philosophies of the various lenders. Describe how commercial banks, mortgage companies and the two thrifts are organized and regulated. Explain why credit unions believe they must get involved in residential mortgage lending. Outline the types of risks lenders mortgage lenders must manage to protect their own investments.

Residential Lenders Mortgage Bankers / Brokers Commercial Banks Savings Institutions Savings Banks (SBs) Credit Unions

Mortgage Banker Functions Originates, processes, underwrites and closes all types of residential mortgage loans, Arranges construction financing, Warehouses closed residential mortgage loans, Sells residential loans, either as whole loans or participations, Sells to private investors or secondary mortgage market, Pools residential mortgages into mortgage-backed securities. Services the loans after sale.

PRIMARY MORTGAGE MARKET RISKS ● Credit risk ● Interest rate risk ● Prepayment risk ● Liquidity risk ● Portfolio risk ● Collateral risk ● Compliance risk

What Do You Think? Explain which mortgage lenders are most important in residential mortgage lending as originators and which as investors. Discuss the major difference between mortgage brokers/bankers and portfolio lenders.

What Do You Think? The mortgage broker is a major originator of residential mortgages. Explore the inherent conflict a mortgage broker faces when originating a mortgage loan. Why are mortgage bankers tied so closely to commercial banks? Which mortgage lender originates the majority of FHA/VA mortgage loans? Why is this the case? How has the number and organization of mortgage lenders changed over the past ten years?

Check Your Understanding The type of financial institution that is the largest holder of residential mortgage debt. This mortgage lender is a financial intermediary, but not a depository. The majority of each year’s residential originations are made by this lender. Its deposits and loans are generally short-term. Purchasers of mortgages or insuring/ guaranteeing agencies impose the only restrictions on residential mortgage lending for this lender.

Check Your Understanding Is the largest originator of FHA/VA loans each year. This lender is limited as to whom it can grant a mortgage loan. It is the largest of all mortgage lenders in number of institutions and assets. This lender borrows money to lend on mortgages by selling commercial paper, mortgage loans or warehousing mortgages. This classification of mortgage lender leads all mortgage lenders in originating conventional loans.

Check Your Understanding This lender is only directly supervised by HUD. Although this lender is a major mortgage lender, it must borrow money to lend. It is the financial institution that provides much of the funds used by mortgage bankers. It has only recently become a meaningful originator of residential mortgage loans. It was forced into mortgage lending by a change in the competition in consumer lending.