Mortgage Bank Definition
A mortgage bank specializes in lending the money against the mortgage for specific securities. They structure various loan products at a cheap rate or with better funding arrangements and involve various activities like loan origination, mortgage sale, and loan/mortgage servicing. The fees on such transactions remain very small; hence the profitability in such businesses remains high.
In countries like the United States, any individual, corporation, or financial institutionFinancial InstitutionFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. can carry out mortgage financing and mortgage servicing activities by taking the required license from the federal institute and state housing boards.
Mortgage banks have the specialized skill of creating a product that can help them in selling off their loan products and will be able to hedge cash flows. As and when the banks lend money against the mortgage, it gives birth to two products –
- Mortgage loans
- Right to service such mortgage loans
Such mortgage loans sell off in the secondary marketsSecondary MarketsA secondary market is where securities are offered to the general public after being offered in the primary market. Such securities are usually listed on the stock exchange. A significant portion of trading happens in such a market and are of two types – equities and debt markets. and retain the right to service them. Servicing such a loan is always inherent in most such loan products. The bank earns fees from loan origination as well as loan servicing.
Features of Mortgage Bank
- Mortgage banks have specialized skills in mortgage loans.
- Their main work areas are mortgage loan origination and servicing those loans.
- Their main source of revenue is loan origination fees (that they charge while processing the fees) and loan servicing fees (that they demand from other players for purchasing the right of servicing the loan).
- They do not accept deposits from the public.
- They function based on their capital and do not need to depend on others to get funds.
- They call themselves mortgage lenders rather than bankers to avoid being considered normal, ordinary banks.
- The size of such banks differs from case to case. Some work at the federal level, and some operate at state-specific geography.
Below are the specific functions being undertaken by a mortgage bank –
#1 – Solicit Business
The major work of such a bank is to identify the individuals or corporations who need funds and own some assets that they can offer as security.
#2 – Perform Financial Analysis
Their major role is to verify the financial stability of their customers and verify the market scenario to predict the trends.
#3 – Perform Financial Counselling
High net worth individuals and corporations who have excess funds or require frequent fundings consult mortgage banks about how they can invest or get their money at an optimum cost.
#4 – Loan Origination
One of the major tasks of such banks is to provide loans, termed as ‘Loan Origination’ in this field. First, they verify the documents and assess the repayment capacity and the valuation of their assets. Then, based on that, they determine the loan’s value that can be landed on them.
#5 – Servicing of Mortgage
Such banks also purchase the right to service the mortgage loan and earn the servicing fees.
Mortgage Banker vs Mortgage Broker
- The rate at which loans are offered is highly affordable.
- Mortgage costs them less as they use their capital.
- One will have to repay a much higher fund than the amount borrowed due to the long funding tenure on borrowing the funds from them.
A mortgage bank is a specialized institute that works in a highly structured way of performing the function of lending money. Their main aim is to reduce the mortgage cost and enhance the lending rate to maximize profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance. by earning the yield spread premium. Therefore, they need to follow the stringent rules set up by the Federal Reserve and file various periodic forms prescribed under law.
This has been a guide to Mortgage Bank and its definition. Here we discuss functions, sources, features, how it works, advantages, disadvantages, and differences. You may refer to the following articles to learn more about finance –