The 3 types of mortgage lenders in the market today are mortgage brokers, national/regional bank owned mortgage companies, and regional mortgage bankers (sometimes called correspondent lenders).  Lets explore the definitions (in a generic way) along with the advantages and disadvantages of each.

Mortgage brokers tend to be small, entrepreneurial, locally owned companies.  Their responsibility is to discuss financing options, take loan applications, and collect documents to process the loan.  They do not have their own funds to close a mortgage transaction and are required to submit loans to an investor for appraiser selection, underwriting, approval, closing, and funding.  The main advantages to brokers are access to competitive programs and interest rates from a pool of investors.  Not having access to their own funds to close loans is their biggest disadvantage.  Because of this they lose control over the process.  In order to meet the Home Valuation Code of Conduct (HVCC) requirements they are forced to use a third party appraisal management company, arranged by the investor, to select an appraiser (for conventional Fannie Mae/Freddie Mac mortgages).  In addition they are required to submit loans to investors for underwriting approval, closing and funding, another loss of control over the transaction.  Imagine what happens to their investors when business spikes; underwriting turn times and review of underwriting conditions become longer and unpredictable (delaying final approval), loans are forced to get in line for preparation of closing documents and document review for loan funding (potentially delaying closing and a timely funding of the transaction).  The current regulatory environment has made it increasingly more difficult for mortgage brokers as they have unfairly become the scapegoat for the mortgage meltdown.

Bank owned mortgage companies are the mortgage divisions of banks.  The mortgage company that is bank owned discusses financing options, takes loan applications, and collects documents to process the loan.  They use to their own funds to close a transaction and they have control over underwriting, closing and funding.  The main advantage of this type of mortgage company is brand recognition.  Because most of them are the end investor or servicer of the loan they are limited in regards to programs and competitive interest rates.  In order to meet the Home Valuation Code of Conduct (HVCC) requirements many use a third party appraisal management company (AMC) to appoint an appraiser (for conventional Fannie Mae/Freddie Mac mortgages).  AMC’s are centralized middle men to the appraiser selection process.  Using an AMC typically means someone in Pittsburgh is deciding on an appraiser for a property in a city as diverse as Houston.  Not being familiar with our city or the appraisers the AMC makes a selection based on the low cost provider or most responsive appraiser at the time.  Many purchase transactions today are falling out because an appraiser, unfamiliar with a neighborhood, appraises a property for less than its true market value.  With the need for tighter quality control and the economies of scale inherent in a large organization underwriting, closing and funding are typically centralized in one processing center which serves the needs of a large region of the country.  Imagine what happens to the processing center when business spikes; underwriting turn times and review of underwriting conditions become longer and unpredictable (delaying final approval), loans are forced to get in line for preparation of closing documents and document review for loan funding (potentially delaying closing and a timely funding of the transaction).  They may have control over the transaction but because of their size and the volume of loans pushing through the center they lose control over the process.

Regional mortgage bankers or correspondent lenders are locally owned and operated mortgage companies.  The regional mortgage banker discusses financing options, takes loan applications, and collects documents to process the loan.  They use to their own funds to close a transaction and they have control over underwriting, closing and funding.  The main advantages of this type of mortgage company is responsiveness to the market, local control over the entire transaction, and access to competitive interest rates and programs from a pool of investors.  Because of their structure regional mortgage bankers can respond to a changing regulatory environment in a manner that adheres to the law and accommodates the needs of the market.  For example the HVCC requirement is met by taking the appraiser selection process out of the hands of the loan officer and places it with a disinterested party with in the company to submit the order and communicate with the appraiser.  Instead of a large list of randomly selected appraisers, a small panel of known appraisers is randomly selected from ensuring that knowledgeable appraisers are used.  Local control over the entire transaction is also a big plus.  Processing, underwriting, closing and funding are in house allowing each transaction to be taken care of based on its needs at the time rather than getting in line.  Finally, they use their own funds to close loans and then sell them to investors which in turn provides competitive loan cost, program, and interest rate options for the consumer.  In my professional opinion this is the best option and business model in the mortgage industry today.  It is also the reason why I work for a regional mortgage banker or correspondent lender.

Make sure you know the source of financing for your next purchase transaction.  Knowing the type of mortgage company you are working with will help you avoid hot issues and ensure a cool closing for all.

Mike McFarland

Certified Mortgage Banker

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