There is often a lot of confusion as to how the mortgage brokerage industry works. Mortgages are not something people deal with frequently and because it is financial product, I can understand the confusion. Sometimes it is best to use other industries as an example. The mortgage industry has some pretty close parallels to buying gas.
Let's imagine you are taking a road trip to visit your family this Thanksgiving. About 300 miles in you look at your dashboard and the gas needle is at less than a 1/4 tank. You need to
fill up so you pull off the highway to find a gas station. On the left side of the road is BP and on the right side of the road is Big Moe's Gas Station. The BP gas station is brand new with balloons, a kid's play area, bright and shiny signage, etc. Big Moe's on the other hand is pretty rinky dink next to the BP by comparison.
You are there to get some gas, so all you are thinking about is the price of a gallon of gas. BP has regular gas advertised for $3.00 per gallon and Big Moe's has gas for $2.95 per gallon. A large number of consumers are going to go to Big Moe's to save money and some are just going to go to BP because they are familiar with BP and never heard of Big Moe.
Most people wonder how Big Moe's is able to undercut BP. It is simple. Big Moe's doesn't have the same overhead as BP. Big Moe's isn't offering a kid's play area. Nor is he too particular about keeping the bathrooms clean. He is only there for one purpose and that is to offer you gas cheaply. Since you really don't care about all the other extras BP is offering, you go get gas from Big Moe's to save a few cents.
Most people would think that BP would be upset about losing business to Big Moe since he is undercutting them. However, BP is smiling all the way to the bank. See, Big Moe's is getting gas from BP wholesale. Big Moe's is actually selling you BP gas five cents cheaper than the BP gas station across the street. BP produces too much gas for them to sell only through their company owned gas stations, so they sell extra gas on a wholesale market to privately owned gas stations. The wholesale gas is cheap enough from BP wholesale so that Big Moe can buy it, add a few pennies to the price so he can make a profit and still offer the gas cheaper than BP does through it's own retail gas stations.
Everyone is happy. You got cheaper gas. Big Moe's made a few cents profit. BP made money selling gas to Big Moe's.
This folks is EXACTLY how the mortgage brokerage business works. Mortgage brokerages are just like Big Moe's and large retail mortgage banks are BP.
There's more to this story though... check back tomorrow. http://www.smartmortgageadvice.com/
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