Mortgage Brokering vs. Mortgage Banking
What’s the Difference?
Understanding what it means to be a mortgage broker and a mortgage banker
By Jaime Borashko
Have you ever considered opening a mortgage company of your own? There are two routes you can take: mortgage broker (wholesale) or mortgage banker (retail). Considering the misconceptions that surround the two, it should be understood the two are extremely different.
What are the big differences?
Mortgage brokers are independently owned mortgage companies that are approved amongst the top wholesale lenders and banks nationwide. They can shop on behalf of borrowers across multiple products lines. This is a huge advantage for consumers who, according to the CFPB Office of Research Working Paper Series; “No Shopping in the U.S. Mortgage Market: Direct and Strategic Effects of Providing Information 2017-01,” left $13 billion on the table in 2016 by not shopping around for the best mortgage option.
Mortgage bankers are originators that close loans in their own name using funds borrowed from a warehouse lender, and then sell the loans to a takeout investor, bank or lender. The additional costs are involved with operating a warehouse line, compliance costs of being a lender, and having to sell loans on the secondary market typically leads to higher operating costs, particularly for smaller startup companies. Their lending platform is structured with products, programs and rates that are based on the investors to whom they sell the loans. They are only able to offer and use the products, pricing and guidelines of their specific bank.
How do pricing and rates compare?
Mortgage brokers are mortgage shoppers that can offer great wholesale rates because they can choose the lender through which to send the consumer’s loan. These lenders compete each day for a mortgage broker’s business. If their rates are not competitive, the mortgage brokers may send their consumer to another lender. This allows the mortgage broker to be more competitive than banks and retail lenders and not at a cost to the consumer.
Mortgage retail bankers are direct lenders with steep operating costs and often have substantial marketing budgets, a corporate hierarchy of management and staffing. Because of this, the profit margins need to cover these costs and are typically included in the higher rates. Consumers are captive to what they offer or can shop on their own for more options.
Well, it comes down to wholesale vs. retail from a consumer’s perspective, think about how you obtain wholesale discounts by going through a contractor on a home renovation. Because the contractor buys more from their resources, they receive a discounted cost on materials. The same applies to wholesale mortgage brokers—resulting in lower rates for the consumer.
In addition to licensing requirements, what financial investments and responsibilities must be considered for each one?
Mortgage brokers are independently owned and operated small businesses in the community that have larger wholesale lenders operating as their back office. They can scale as large or small as they want; the majority average is three to five employees. The loan processing may be outsourced to third-party licensed processors, which eliminates immediate salary expenses. Brokers must adhere to their respective state and licensing requirements, and must meet annual renewals to maintain their relationships with wholesale lenders. The wholesale lender will also table fund the transaction for them. Many wholesale lenders don’t require authorization to disburse funds, so borrowers and loan officers are never waiting at the table or going back to the lender for approval to fund.
Mortgage banking carries the responsibility of underwriting and internal staffing, in addition to adhering to more stringent insurance requirements. There is also a need for increased liquidity in their company business model. They also fund loans in their own name, so approval of a bank line of credit or warehouse line is required so they have enough capacity to close the expected number of transactions and have the funds to lend. A Banker must also qualify for a lender license within his or her respective state if the broker is looking to be independently owned. Or, the Broker can give a portion of the operating revenue to go underneath an already-established licensed entity.
What is the easiest barrier to entry in mortgage lending?
A mortgage broker business can be started for approximately $25,000, depending on the state and licensing requirements, as well as the requirements of the wholesale lenders.
In addition to that cost, a mortgage banker requires at least one warehouse line of credit, which will require a more substantial net worth, personal guarantees of the owner and likely audited financial statements at an annual cost.
After evaluating all of the requirements and steps involved for both, mortgage brokering is the simplest and least costly way to enter into mortgage lending platform.
Jaime Borashko, UWM’s director of wholesale development, actively implements programs and strategies to help accelerate independent mortgage brokers to join the wholesale market. Nationally, she promotes the advantages within the wholesale mortgage category to consumers, real estate professionals, loan processors and all financial institutions to educate them on the benefits of the industry and strategically grow their business.