Mortgage Bank

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.

They work in a very structured manner and is specialized in lending function. They aim to control the mortgage cost and increase the rate of lending money. They function under strict rules of Federal Reserve and are required to file many forms as prescribed by the law.

• A mortgage bank is an institution that specializes in making loans secured by mortgages for specific properties. 
• They engage in various activities such as loan origination, mortgage selling, and loan/mortgage servicing and offer different loan products at competitive rates or with favorable funding arrangements.
• Despite low transaction fees, mortgage banks remain highly profitable by minimizing expenses and retaining essential information for legal and tax purposes.
• Mortgage bankers lend their capital and operate under their name, while mortgage brokers borrow money from financial institutions and operate under the name of those institutions.

In countries like the United States, any individual, corporation, or financial institution can carry out mortgage financing and mortgage servicing activities by taking the required license from the federal institute and state housing boards.

A  mortgage bank association has 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 markets and retain the right to service them. Servicing such a federal mortgage bank loan is always inherent in most such loan products. The bank earns fees from loan origination as well as loan servicing.

• They have specialized skills in mortgage loans. They use this skill to perform the various functions like loan origination, selling and servicing loan, creating different competitive loan related products with less mortgage bank rates, etc.
• 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 have the ability to identify a qualified borrower who has the ability to handle the loan and make the repayment on time.
• They do not accept deposits from the public. This features make them unique and different from banks inspite of being a financial institution dealing with loans which is very similar to a normal banking function.
• They function based on their capital and do not need to depend on others to get funds.
• Mortgage bank association calls themselves mortgage lenders rather than bankers to avoid being considered normal, ordinary banks. This is related to the fact that they do not accept public deposits like normal banks.
• They can easily identify why a loan application is to be accepted or rejected. It is also possible for them to find out any causes of exceptions in the above cases.
• 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. Based on this, these lenders extend loan to the borrowers which also reduced the risk of default and loss for the lenders.

#2 – Perform Financial Analysis

Their primary role is to verify the financial stability of their customers and verify the market scenario to predict the trends. For this purpose, a thorough and robust financial analysis is needed. This is necessary to understand and estimate the borrower's creditworthiness. Loan default or borrower going bankrupt during the federal mortgage bank loan term is highly detrimental to the lender, be it banks or mortgage lenders.

#3 – Perform Financial Counselling

High net worth individuals and corporations who have excess funds or require frequent funding consult mortgage banks about how to invest or get their money at an optimum cost. This is an important function because it helps in mobilizing the funds that whuld otherwise remain idle with these individuals. Mortgage lenders councel such investors with proper knowledge and understanding about the various ways in which their funds can be invested with best returns and how such investment can help individuals who would be able to use them for some productive purpose.

#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 they can  borrow. This function is related to analysis where the lenders assess the creditworthiness of borrower to avoid default or bankruptcy. Financial analysis is the first step of loan origination.

#5 – Servicing of Mortgage

Such banks also purchase the right to service the mortgage loan and earn the servicing fees.

Let us assume ML Lenders to be a mortgage bank who perform multiple functions like mortgage lending, credit analysis, loan servicing, financial counselling for high-net-worth clients, etc. ML Lenders have successfully extended loans to huge number of individual and corporate clients both in manufacturing and retail sectors. It is growing very fast, offering very low rates and low cost of lending.

Let us look at the advantages of mortgage bank account in detail.

• The rate at which loans are offered is highly affordable. This helps then to get more loans due to mortgage bank rates being less and expand the lending business. Borrowers see them as an affordable source of funds.
• Due to the detailed and proper financial analysis that every lenders do as the initial step of the lending process, it helps them to eliminate cases where borrowers are such that they will not be able to pay back the amount. It makes them a more dependable source of funding.
• Risk of lending is less because of the structured borrower’s analysis that they do.
• Mortgage costs them less as they use their capital. It not only helps in bringing down the lending cost, but also in mobilizing their own funds for some productive use and earn revenue.

Let us look at the disadvantages of mortgage bank account.

• 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.

This has been a guide to what is Mortgage Bank. We explain its functions, differences with mortgage broker, along with example, features & advantages. You may refer to the following articles to learn more about finance –

• Mortgage Bond
• Collateralized Mortgage Obligations
• Offset Mortgage
• Mortgage Recast
• Rehypothecation