Real estate and the finance industry in general have key players throughout various segments which all play an important part. In the mortgage industry, that is especially so. But there are two key components that play an especially important part that many are not aware of. Mortgage brokerage and secondary markets. Let’s take a closer look at what each does and why they matter.
A mortgage broker is an individual or company that originates mortgage loans. A mortgage broker doesn’t make the loan but instead has marketing agreements with multiple mortgage companies. Part of this marketing agreement provides mortgage brokers with discounted loan programs. In effect, these discounts create a “wholesale” market compared to a retail market. Wholesale lenders offer these discounts because the marketing and origination is not part of their purpose. Marketing and origination is up to the mortgage broker.
The advantage with a mortgage broker is having access to multiple loan programs. Most mortgage companies have their own internal set of loan programs but not offer what some other companies do. This can mislead certain consumers who need a certain type of loan to accommodate their situation but when the application is turned down, they mistakenly think that’s the industry standard.
For example, a self-employed borrower that doesn’t receive regular pay checks on the 1st and 15th but gets paid at various times throughout the month. Instead of having pay check stubs, bank statements will show how much the individual makes by reflecting these deposits. Not all mortgage companies have this program. But a mortgage broker can have access to lenders who do offer a program that will work.
In addition, mortgage brokers can turn to different lenders to compare not just the types of loan programs but the individual rates that accompany these loans. Without mortgage brokers, fewer people would get qualified and rates may not be as competitive on the retail level.
Now let’s take a look at secondary markets. Secondary markets in the mortgage industry buy and sell mortgage loans, either individually or in bulk purchases. Today, when a mortgage company issues a mortgage loan, it is going to be sold in most cases. When a bank issues a loan without any intentions of selling, it’s likely the loan is a special type of program that doesn’t quite fit the model of a traditional mortgage. This is called a portfolio loan because the loan is kept in the lender’s portfolio.
Being able to sell a mortgage provides crucial liquidity in the mortgage industry. When a lender makes a mortgage loan, it draws funds from a line of credit. Selling the loan replenishes the credit line allowing the lender to continue making more loans. Without the ability to buy and sell loans the real estate industry would be harmed as fewer and fewer mortgages would be made. The only time a lender would be able to get all the money back from the original mortgage would be through the sale of the property.
The primary buyers of mortgages are Fannie Mae and Freddie Mac. These two mortgage giants purchase the lion’s share of all residential and commercial mortgage loans made in the United States. Nearly two out of every three residential mortgages issued are ultimately sold to either. Both Fannie and Freddie were established for the sole reason to provide liquidity in the secondary market. Which also brings up another frequent question: what happens when your loan is sold?
Essentially very little. The company you write your checks to each month is the servicer, not the owner of your mortgage. The servicer collects a fee on each payment made while the original loan is sold to either Fannie or Freddie. And, it’s not uncommon for a loan to get sold several times over the life of the loan. But to the borrowers, it really doesn’t impact much of anything.