Mortgage Bank Definition
A mortgage bank is a bank with a specialization in lending the money against the mortgage of any specific securities. They structure various loan products at a cheap rate or with better funding arrangements and involves various activities like loan origination, mortgage sale, and Loan servicing/mortgage servicing. The fees on such transactions remain very small hence the profitability in such business remains high.
In countries like the USA, any individual or 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 the activities related to mortgage financing and mortgage servicing by taking the needed license from the federal institute as well as state housing boards.
Mortgage banks have the specialized skill of creating the 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 the money against the mortgage, it gives birth to 2 products –
- Mortgage Loan
- Right to Service such a Mortgage Loans
Such mortgage loan sell-off in the secondary markets and right to service such loan will be retained. Servicing such a loan is always is inherent right in the majority of such loan products. The bank earns fees from Loan Origination as well as Loan Servicing.
Features of Mortgage Bank
- Mortgage banks are banks that having specialized skills in the field of mortgage loans.
- Their main area of work is Mortgage loan origination and of servicing of mortgage loans.
- Their main source of revenue is loan origination fees (that they are charging while processing the fees) and Loan servicing fees (that they charged from other players for purchasing the right of servicing the loan).
- They do not accept deposits from the public.
- They function based on their own capital. They do not need to depend on others for getting funds.
- They generally called themselves as Mortgage lenders rather than bankers, to avoid being considered as normal other banks.
- The size of such banks differs from one case to another. Few are working at the federal level, few are operating state-specific geography.
Below are the specific functions being undertaken by the bank –
#1 – Solicit Business
The major work of such a bank is to identify the individuals or corporations who are in need of funds however they are having 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 to verify the market scenario to predict the trend of the market.
#3 – Perform Financial Counselling
High net worth individuals and Corporations who are having excess fund or who are in need of fund, frequently consults mortgage banks about the way they can invest or get money at the most optimum cost.
#4 – Loan Origination
One of the main works of such a bank is to provide the loan, term as loan origination in this field. They will verify the documents, assess the repayment capacity, assess the valuation of assets that they owned, and based on that they will determine the value of the loan that can be landed to them.
#5 – Servicing of Mortgage
Also, such banks purchase the right to service the mortgage loan and will try to earn the servicing fees from it.
Mortgage Banker vs Mortgage Broker
|Mortgage Banker||Mortgage Broker|
|They do business by lending their own capital||They borrow money from financial institutions and organizations|
|They do not require to disclose the price at which mortgages are sold by them||They need to disclose the additional fees charged by them from the customer|
|They do business in their own name.||They need to operate in the name of financial institutions and organizations.|
|Yield Spread Premiums at which loan is given does not become an additional fee for them||Yield Spread Premium at which loan is given becomes an additional fee earned by them|
- Rates at which loans offered are highly affordable
- Mortgage Cost for them as low as they are using their own capital
- On borrowing the funds from them, due to the long tenure of funding, one will have to repay back the fund much higher than the amount borrowed.
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 to enhance the rate of lending to earn the yield spread premium so that they can 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.. They need to follow the stringent rules as set up by Federal Reserve and need to file various periodic forms prescribed under law.
This has been a guide to Mortgage Bank and its definition. Here we discuss functions, sources, features along with how does it work, advantages, disadvantages, and differences. You may refer to the following articles to learn more about finance –