Mortgage Lenders

The term ‘mortgage lenders’ used to refer to organizations which actually originated the funding for home mortgages, but that is no longer the case. This has resulted in a good deal of confusion in the market, as mortgage lenders now comprise quite a diverse group, with the principal players being as follows:

1. Mortgage bankers;
2. Portfolio lenders;
3. Wholesale lenders;
4. Mortgage brokers;
5. Direct lenders; and
6. Correspondent lenders.

The following is a brief explanation of each type of mortgage lender.

Mortgage Banker

A mortgage banker is an organization which arranges home mortgages for the purpose of on-selling them in the secondary mortgage market. Some mortgage bankers have relationships with associated companies for actual loan funding, but this is not a requirement for the title. The on-selling of a mortgage by a mortgage banker does not necessarily mean that borrowers cease their relationship with their lender, as some mortgage bankers continue to service the loans which they arrange following a sale.

Portfolio Lender

A portfolio lender is an organization which itself lends the funds for home mortgages, but which then retains (rather than sells) some or all of those mortgages for investment portfolio purposes. However, a portfolio lender can also be (and usually is) a mortgage banker if it is selling some of its mortgage portfolio on the secondary market. Portfolio lenders often continue to service the loans which they originate.

Wholesale Lender

A wholesale lender is an organization which originates loan funding but does not deal at the retail end of the market, and consequently does not deal directly with borrowers. Wholesale lenders always deal through a third party such a mortgage broker. A wholesale lender can be either a mortgage banker (by on-selling its mortgages) or a portfolio lender (by retaining some or all of its mortgages).

Direct Lender

A direct lender is not strictly a separate category of lender but a qualifier to the other categories of mortgage lender. A direct lender is a mortgage lender which lends in its own name, even though the funds for that lending might have been sourced from lines of credit established with other lending institutions.

Some mortgage brokers are now offering loans in their own name by having similar lines of credit with lending institutions, but it is important to be clear that when mortgage brokers act in this way they are not acting as brokers but lenders. Some commentators do not agree that brokers are lenders when they behave in this manner, for the reason that they enter into mortgage sale contracts contemporaneously with the borrower’s contract, and that consequently the broker is not in fact risking its own capital. That is a rather generous interpretation to the brokering fraternity.

Correspondent Lender

A correspondent lender is a relatively recent term which applies to organizations which are able to authorize loans on behalf of a mortgage lender. Many correspondent lenders are (or were) mortgage brokers which have developed very close and preferred relationships with mortgage lenders. A characteristic which distinguishes correspondent lenders from mortgage brokers and other lenders is that they tend to individually sell the mortgages which they arrange rather than pooling them with other mortgages for resale.

The above are the principal types of mortgage lenders. Each has its own functions and each has its own particular advantages to offer to prospective borrowers.