In Part 1, I provided some background info on what happens with most mortgages after the close of escrow. The reason I started with this is because I wanted to show that regardless of what kind of lender you choose to get your loan from or the mortgage loan originator (MLO) you choose to use, almost all loans these days are sold off to the secondary market after the close of escrow.
Having your loan sold after the close escrow and who actually services your loan really isn't that important - really it's not! What is important is the origination of the actual loan transaction and the MLO you choose to originate your loan. However, if where your loan ends up is important to you, you will be limited to pretty much one type lender.
When it comes to the various types of lenders that a buyer has available there are a few different options and every one of them has their pros and cons. I'd like to start off with depository lenders, which are lenders that engage in other types of banking and lending operations besides just mortgage lending.
So what kind of lenders are depository lenders?
Portfolio Lender: Local credit unions as well as savings & loan companies are quite often portfolio lenders, as well as some banks. A portfolio lender will typically use the funds that they have from deposits from their customers to lend to borrowers. Portfolio lenders generally promote their own small suite of loans that consist of just a few loan products. They hold their loans in-house and do not sell them off to the secondary market right after the close of escrow. Many borrowers may find that this is a really nice benefit to using a portfolio lender.
Furthermore, the decision makers for loan approval, the underwriters, work directly for the portfolio lender, this way the portfolio lender has more control over the loan process. Additionally, it may also be easier to qualify for a portfolio loan because a portfolio lender is not bound by the rules, regulations and guidelines of government sponsored enterprises (GSE's) or the lender overlays of any other types of private investors.
However, borrowers using a portfolio lender will most certainly pay a premium rate for these benefits because portfolio lenders are typically not as competitive in rates as other types of lenders who do sell their loans off to the secondary market after the close of escrow.
Lastly, portfolio lenders may elect to sell their portfolio loans at some later date once a loan has become seasoned. At this point, they become just like every other loan sold off to the secondary market - they are packaged as mortgage backed securities (MBS) and sold off to either a GSE or a private investor. In some cases, the portfolio lender may likely retain servicing rights, which means the borrower may still send the mortgage payment to the portfolio lender.
Direct Lender: Direct lenders are usually your local community banks or the large, national, retail lenders (BofA, Wells Fargo, Chase, etc...) that are typically promoting their own small suite of loans that consist of just a few loan products. Direct lenders will fund these loans either through their assets or their customers deposits or through the use of a warehouse line of credit.
This type of lender is lending directly to the borrower. However, unlike the portfolio lender, a direct lender typically will sell the loan off to the secondary market after the close of escrow. By selling their loans off to the secondary market after the close of escrow, direct lenders are able to offer more competitive rates than the portfolio lender who is not selling their loans off to the secondary market.
The direct lender also employs underwriters who work directly for them so that the lender has more control over the loan process. However, because direct lenders are selling their loans off to the secondary market after the close of escrow, their loans must adhere and be underwritten in accordance to the rules, regulations and guidelines for the loan program as well as the GSE or any private investor.
When selling loans on the secondary market, a direct lender will earn a servicing release premium (SRP) for allowing the secondary market investor to service the loan. This SRP rate is not disclosed to the borrower.
The MLO's that work for depository lenders are not required to be licensed in accordance with the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act.
This means that these types of MLO's are not required to adhere to any upfront and/or any annual continuing education in order to continue originating loans. They also do not have to submit to any federal and state testing in order to measure their education, training, knowledge and/or experience in the mortgage industry.
MLO's for these types of lenders are also not subjected to FBI background checks, they're not finger printed and they also do not have to agree to personal credit checks. Furthermore, there is no national complaint mechanism for reporting unethical and/or illegal activities on MLO's for depository institutions as there are for SAFE Act licensed MLO's.
Stay tuned for Part 3 where I discuss the other types of lenders that are not depository lenders and that engage in only mortgage lending.
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 1
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 3
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 4
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 5
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 6
Comments(8)