Lender Vs. Broker- What's The Difference?

By
Mortgage and Lending NMLS License #113781
Basically, you have three main business models in the mortgage profession: Bank related mortgages, correspondent lenders, and mortgage brokers.  Their business models are as follows:

Bank related mortgage- Bank funds loans from bank funds and has loans securitized in a pool of mortgage backed securities in a sale to Fannie Mae or Freddie Mac to replenish funds to bank.  Banks have commonly known names so many people use them for their mortgage lending needs.  The problem is that many banks do not have great pay plans so they take on a lot of new loan officers or they take on seasoned loan officers who are skipping over to that bank from another bank with a lower pay plan thus they don't stay long.  This is not the case everywhere.  There are many good loan originators working for banks.  (So, good bank l.o.'s on a good pay plan don't rip me for this.)

Correspondent lender (Commonly Termed Mortgage Banker)- Funds loan through what is called a "warehouse bank".  Has a period of time to sell the loan off the "warehouse line" or buy the loan and service the loan.  Basically, a large line of credit is used to fund loans.  Loans are sold or serviced after this.  If you are not a bank and you fund mortgage loans on your own, you are probably a mortgage banker. Correspondent lenders make what is called SRP (servicing released premiums) for selling the loan in the secondary market.  The speed of the process and the pricing will usually be better with a correspondent lender than a broker as a company.  The correspondent lender usually puts up at least a couple of million dollars to access warehouse bank funding lines.  Brokers usually can't afford to go this route.  The bank rewards the correspondent lender with better pricing because of this.  Not that it matters, but this is the area of mortgage lending I am in.  

Mortgage broker- Finds the most competitive bank (rate and/or underwriting turn time) and submits file to them.  Bank underwrites and funds loan.  Because in the past mortgage brokers could sign up with subprime lenders, Alt-A lenders, and conforming lenders, they had a wide variety of offerings that individual banks which were limited to their own products could not compete with.  This is why the majority of mortgage loans were done by brokers.  The tables have turned recently, though.  Now that brokers don't have the many product offerings they once had, they will find it difficult to compete with correspondents who can offer better price and service because they are not bound by they lenders underwriting their file.  I know some excellent mortgage brokers who will be able to accomplish this because they understand the best rate on the wrong program for the client's situation is no good.  They are professional advisers, not rate auctioneers.  Many brokers cannot afford the $63,000 net worth requirement to get FHA approved.  If the broker doesn't do FHA loans, chances are they don't have $63,000 or they are still holding on to hope that subprime lending will come back (Newsflash- It won't).  Do you want to do business with someone in the lending business that is this thinly capitalized?  Make sure whoever you do business with is FHA approved or in the process of receiving approval (not just VA approved- that only costs $100 to get approved) for this reason and the fact that conforming lending is a channel that is getting harder and harder to get borrowers approved through.  Since the stimulus package was approved, my area's FHA limit is now $271,050.  75% of my business is FHA now (Although I've used FHA financing since the mid-1990's for 40% of my business, FHA has had a small market share in the overall lending market until recently).  I can't imagine how much longer a broker without this approval can stay in business.  

As far as a lender having better lending authority than a broker, this is simply not the case.  Very few lenders are going to the bank vault and loaning money to service a hometown loan based on a hometown lending decision.  If they are, they will have to price risk into the loan and they will not be able to compete.  Almost all lenders and brokers submit their files through one of two automated underwriting platforms: Fannie Mae's Desktop Underwriter- DU (Desktop Originator- DO for brokers) or Freddie Mac's Loan Prospector (LP).  Some investors have their own proprietary u/w system like Countrywide CLUES/CLOUT system, Chase Zippy, etc. but those systems are all built on infrastructure bases provided by Fannie or Freddie's system.  FHA loans are also run through DU or LP for decisions through a system called FHA's Total Scorecard.  The findings from these automated underwriting systems must be followed whether you are a broker or a lender.  Otherwise, the loan will not be allowed to be purchased by one of the agencies (Fannie or Freddie) or insured through FHA.  The only time a lender can go outside of this where a broker cannot is when they offer a portfolio loan.  This is a loan they will service in their lending portfolio.  Although lenders will sometimes portfolio a loan, the majority (like 99% in this market) will either be an agency loan (often called conforming, as in conforming to Fannie Mae or Freddie Mac guidelines) or they will be a government loan (FHA or VA).  Therefore, the underwriting decisions will almost always be the same broker or lender.  The service and professionalism of a good loan officer working for a good company is the edge to look for.

Comments (7)

Summit Realty Group
Summit Realty Group- The Future of Real Estate Today! - Highlands Ranch, CO

 

Great article. I have spent a lot of time trying to explain the difference to my agents and to my clients.

Mar 23, 2008 07:56 AM
Misty Thomas
Houston Realty - Crosby, TX
Realtor Crosby, TX
Really great, informative blog. Thank you for posting. I am trying to learn all that I can regarding the loan side.
Apr 25, 2008 10:18 AM
Bryan Chanthavichith
Morgan Financial, Inc. - Scottsdale, AZ
Awesome info!
Apr 25, 2008 12:11 PM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Kevin... I don't want to come across negative or sound rude.  You supplied some good information, but in my opinion, some of this is misleading.

You stated.....  Do you want to do business with someone in the lending business that is this thinly capitalized? Make sure whoever you do business with is FHA approved or in the process of receiving approval

Why am I attacking this statement?  Because not everyone FHA approved is a safe bet also.  So many make promises and then the deal crashes and burns. Not everyone FHA approved knows what they are doing. I have closed 3 deals in 41 days that went to another lender who was FHA approved and they never made it to closing.

 

Also....  just being a correspondent lender is not the best either.  I am not a bank such as B of A, Wells, or Countrywide..... but I am a mortgage banker which is still better than a correspondent lender. Why?  Because we underwrite our own FHA mortgages in-house, manually. You don't touch upon this..  and I have the best of both worlds, because I can broker loans out if I had to...

Just some FYI and my opinion....  thanks

jeff belonger
Apr 27, 2008 02:31 PM
Juan Boldizsar
Belleville, IL

Kevin,

Like Jeff, I don't want to sound rude or rain on anyone's parade either.  It's just that the broker-banker comparison cannot be painted with as wide a brush as many on the "mortgage banker" side try to do.  In that regard, here's a couple of things that I'd like to share:

First of all, even the "net worth requirements" imposed on mortgage bankers (as opposed to depository institutions that offer mortgages) offer little to protect an unwary borrower if the loan officer is a crook or the "in-house" underwriter is vulnerable to pressure from sales managers.  Last year I worked for a large national lender and took a healthy number of portfolio defense calls.  The vast majority of them 1) were in connection with pay-option arms, 2) were from borrowers that could be considered "unsophisticated" for one reason or another, 3) involved "stated-income" loans where the income stated on the application for the loan being refinanced was overstated by a factor of 150% to 900% AND 4) were originated by mortgage bankers.  Not one of them paid the "mortgage banker" less than 300 basis points in SRP.  One particularly notable instance involved a situation where the mortgage banker's compensation (origination plus SRP) added up to almost $25K on a $500K rate/term refinance for a borrower with ficos exceeding 700.   It was quite an eye-opener.  By the time the correspondent lender enforces its repurchase agreement against outfits like the ones I describe, there's not much -- if anything -- left for the borrower. 

Second, just because a company is a "mortgage banker" does not necessarily mean that the customer gets the benefit of improved pricing.  There are plenty of them out there that DO NOT give their loan officers access to raw pricing -- they put together their own ratesheets reflecting pricing even less favorable than what a broker gets and keep the difference for the house.  One of my friends worked as a manager for one of these outfits for just long enough to find out the nature of the shennanigan and promptly resigned.

Third, not all brokers are "thinly capitalized" as your post seems to imply.  Off the top of my head, I can think of a couple of mortgage brokerages in my own area that are owned by banks that, in turn, are part of a bank holding company that has $1 billion in assets.

Last, not all mortgage bankers underwrite the loans they make.  As a result, they are as much at the mercy of the underwriting department of the "investor" -- isn't that what mortgage bankers like to call wholesale lenders? -- as brokers are. That, in turn, makes these mortgage bankers little more than glorified mortgage brokers.

In any event, the point I'm trying to make is that, as with many aspects of life and business, one cannot judge a person or entity strictly on the basis of the category into which they fall.  Again, please, do not interpret any of the foregoing as an attempt to impugn either you, the company for which you work or "mortgage bankers" in general.  All I ask is that if we are going to shine a light on a subject, we make sure to cover the whole thing.  I've been associated with all three types of companies in the past, each with its own idiosyncrasies, pros and cons.  Those experiences have taught me that the benefits and detriments associated with each have more to do with the individual entity rather than the label bestowed upon it.

Best regards,

Apr 27, 2008 07:20 PM
Kevin Whatley
Flower Mound, TX
Professional Mortgage Lender
Jeff:  I'm a bit confused with the reply.  A mortgage banker and a correspondent lender are the same thing.  Correspondent lenders fund their own loans.  The difference you are referring to would be related more toward whether the mortgage banker/correspondent has direct endorsed (DE) underwriting.  Many, probably most, correspondents have their own underwriters (in-house) for FHA loans.  Most correspondents have the ability to broker loans as well. 

 

Juan:  Unfortunately, neither net worth requirements nor any other rules can keep many of those who will break the rules (broker or banker) from doing so.  Second, mortgage bankers do receive better pricing; however, if a company, after receiving the better pricing, decides to alter their internal ratesheet, that is another matter.  The price sheets on mortgage banking/correspondent are better than as issued to brokers.  What is done after that is another issue (maybe a good future Active Rain post).  Third, all brokers are not thinly capitalized and the post does not imply that. If a mortgage company does not meet the $63,000 net worth requirement established by HUD, that company is thinly capitalized.  Many (not most) do not meet this requirement.  Last, it depends on the mortgage bankers underwriting relationships.  Please read over again my last few statements in this piece: "The only time a lender can go outside of this where a broker cannot is when they offer a portfolio loan.  This is a loan they will service in their lending portfolio.  Although lenders will sometimes portfolio a loan, the majority (like 99% in this market) will either be an agency loan (often called conforming, as in conforming to Fannie Mae or Freddie Mac guidelines) or they will be a government loan (FHA or VA).  Therefore, the underwriting decisions will almost always be the same broker or lender.  The service and professionalism of a good loan officer working for a good company is the edge to look for."

Thanks for the replys.  
Apr 28, 2008 01:40 AM
Juan Boldizsar
Belleville, IL
Points well taken.  Brokers have access to portfolio lenders too, though.  Beyond that, I have yet to see a "mortgage banker" keep anything "in portfolio" for any longer than it takes them to sell it off to its investor.  Example in point:  a company here in Chicago holding itself out as the largest independent mortgage lender in the Midwest offers rate locks 5 days shorter than the standard you see on wholesale price sheets.  Why?  I can't say for sure since I don't work for them, but I reckon it's to give them enough time after closing to get the file to their "investor" without exposing themselves to any interest rate fluctuation risk.  I've seen others that even have the gall to pass along to the borrower the recording fee for their assignment of mortgage that they include in the closing package.
Apr 28, 2008 02:00 AM