December 22, 2000

"What is the difference between a lender and a mortgage broker?"
 "What is the diffeesrence between a retail lender and a wholesale lender?"
 "What is a 'direct' lender?"
 "What is the difference between a mortgage broker and a loan officer?"
 "What is a portfolio lender?"

The lender is the one who provides the money to the borrower at the closing table. In exchange, the lender receives a note evidencing the borrower's debt and obligation to repay, plus a lien on the subject property.

Mortgage brokers do not lend. They are independent contractors who offer the loan products of multiple lenders, called wholesalers.

A broker finds potential customers and counsels them on the loans available from different lenders. They also counsel on any problems involved in qualifying for a loan, including credit problems, take the borrower's application, and usually process the loan. Processing includes compiling the file of information about the transaction, including the credit report, appraisal, verification of employment and assets, and so on. When the file is complete, it is handed off to the lender, who funds the loan.

Lenders who perform all the loan origination functions themselves are called "retail lenders". Lenders who have certain functions performed for them by mortgage brokers are called "wholesale lenders". Many large lenders have both retail and wholesale divisions. The division of functions is shown below.

Function	Retail Lender	Wholesale Lender	Mortgage Broker
Find & counsel customers	X		X
Take application	X		X
Lock loan terms	X	X
Process loan	X		X
Underwrite loan	X	X
Close & fund loan	X	X

The term "direct lender" is one that small lenders sometimes use to distinguish themselves from mortgage brokers.

Loan officers are employees of lenders or mortgage brokers. Loan officers find, sell and counsel customers, and take applications. Loan officers employed by mortgage brokers may also be involved in loan processing. In the case of a one-person mortgage broker firm, that person is both the broker and the loan officer.

While loan officers are employees, they act more like independent contractors. They are compensated largely, if not entirely, on a commission basis. The typical commission rate is 1/2 of 1% of the loan amount, and successful loan officers earn 6 figure incomes.

Both lenders and mortgage brokers post prices with loan officers to be offered to consumers. The loan officers usually have limited discretion to reduce the price if necessary to meet competition, and full discretion to raise the price if they can. The difference between the posted price and the price charged the consumer is called an "overage", and it is usually shared with the loan officer.

Reasonably astute shoppers will probably do better dealing with a mortgage broker than with a lender. Because mortgage brokers deal with multiple lenders, they can shop for the best terms available on any given day. In addition, they can find the lenders who specialize in various market niches that many other lenders avoid, such as loans to applicants with poor credit ratings. On the other hand, the risk of encountering a rogue who will trick you into paying more than you should is higher among mortgage brokers than among lenders.

Borrowers can guard against rogue brokers by selecting an Upfront Mortgage Broker (UMBs). Conventional mortgage brokers add a markup to the wholesale prices of lenders to quote an all-in price to consumers. UMBs in contrast charge a specified fee for their services, and pass through the wholesale prices to the consumer. There is little risk of chicanery in dealing with UMBs.

Lenders are further distinguished as "mortgage bankers" or "portfolio lenders." Mortgage bankers sell all the loans they make in the secondary market because they don't have the long-term funding sources necessary to hold mortgages permanently. They fund loans by borrowing from banks or by selling short-term notes, repaying when the loans are sold.

Mortgage banks now dominate the US market. Of the 10 largest lenders last year, 9 were mortgage banks and only one was a portfolio lender. However, many of the large mortgage banks, such as Chase Manhattan Mortgage and Wells Fargo Mortgage, are affiliated with large commercial banks.

Portfolio lenders include commercial banks, savings banks, savings and loan associations, and credit unions. They are sometimes referred to as "depository institutions" because they offer deposit accounts to the public. Deposits provide a relatively stable funding source that allows these institutions to hold loans permanently in their portfolios. Washington Mutual, a savings bank, is the only depository on the list of the 10 largest mortgage lenders.

Mortgage banks often offer better terms on fixed-rate mortgages than portfolio lenders, while the reverse is more likely for adjustable rate mortgages. It would be a mistake to place too much reliance on this rule, however, because the variability within each group is very wide.