• Mortgage Banking

    The word mortgage means “A conditional conveyance of property as security for the repayment of a loan” and the banking associated with it is called as Mortgage Banking. According to the definition by Mortgage Bankers Association of America, Mortgage Banking can be defined as “The Origination (Loan creation),Sale(Secondary Marketing), and Servicing (Loan Service) of mortgage loans secured by either residential or commercial real estate”.

    In the simplest term, Mortgage Banking is a transaction between the Borrower and the Mortgage Banker. A Mortgage Banker serves as the middleman between a consumer and a service, or a range of services.  The borrower is considered the consumer, and the service provided is the financing of his or her loan.

    The Mortgage Banking process is however cyclic which helps the mortgage bankers to generate more money from the investors for more lending. The following diagram refers the entire process

    Mortgage Banking Process Flow

    The mortgage banking flow can also be explained using the following example:

    1. A Borrower decides that he or she would like to purchase a home for which he needs loan from the bank or lender.
    2. The Borrower goes to a Mortgage Banker who provides financing for the purchase by making a loan to him. The Mortgage Banker is the middleman between the Borrower and the investor in the mortgage market.
    3. After the Mortgage Banker has made several loans their company may decide to pool these loans together and sell them to an outside investor to make a short-term profit.
    4. The proceeds from this sale are then used to pay for the operating expenses of the mortgage banker, which allows the company to make (originate) more loans.

    The following list gives a detail overview of the different participants in the mortgage banking process.

    Borrowers: As we already know that borrowers are the one those who takes the                                                                                                     loan as and when needed. The Borrower which can be an individual or a corporate may take a Loan to buy a house or a commercial property. Borrowers can use the mortgage banking transaction for two purposes.

    A purchase money transaction is the acquisition or property through the payment of money or its equivalent. This is the method used by all the first-time home buyers that require financing.

    A refinance transaction is the repayment of a debt from the proceeds of a new loan using the same property as security.

    Lender: Lender provides the Loan to the Borrower when needed. In mortgage banking, the lenders are mainly the banks and financial institutions etc who provide direct loans to the borrower.

    Investors: Companies, Government Agencies who buy loans from Lenders. Raise money from the financial market by issuing bonds / Mortgage Backed Securities (MBS). Investors provide the required fund to the lenders so that they can service new loans whenever they come across in order to gain high returns on the capital investment.

    Private investors purchase whole loans or invest in “pieces” of the loans as investments:

    • Investors buying pools of loans
    • Investors buying Mortgage Backed Securities (e.g. insurance companies, mutual funds)
    • Investors buying Interest Only and Principal Only strips
    • Mortgage Bank’s own loan portfolio (Community Banks, Regional Banks, National Banks)

    Service Agencies: Agencies who collect money from borrowers towards repayment of loans and funnel it to investors. As the borrower repays his part to the bank from which he has borrowed, these agencies make sure that the Investors get his part as he has purchased that Loan.

    Credit Reporting Agencies: Report Credit Score and Transaction Details of Borrowers which are very important for the lender to approve the loan and fix the interest rate. Lower credit score indicates higher risk and higher interest rate as well.

    Appraisers: Evaluate and appraise the value of the subject property against which the loan has been taken. They are the third party which provides the value of the property independently to remove any confusion regarding the valuation of the property.

    Brokers: These are the middleman who brings the borrowers to the lenders. They make the processing of loans faster as they are well aware of the needful that is required for loan processing. For that they earn some fees from the borrowers for the help.

    Insurances Companies: They provide the required insurance to the large amount of funds the lenders and investors are investing. For the same, they charge a premium on the funds insured.

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