Product Code Database
A mortgage broker acts as an intermediary who brokers on behalf of individuals or businesses. Traditionally, banks and other lending institutions have sold their own products. As markets for mortgages have become more competitive, however, the role of the mortgage broker has become more popular. In many developed mortgage markets today, (especially in the United States, Canada, the United Kingdom, Australia, New Zealand, and Spain), mortgage brokers are the largest sellers of mortgage products for lenders. Mortgage brokers exist to find a bank or a direct lender that will be willing to make a specific loan an individual is seeking. Mortgage brokers in Canada are paid by the lender and do not charge fees for good credit applications. In the US, many mortgage brokers are regulated by their state and by the CFPB to assure compliance with banking and finance laws in the jurisdiction of the consumer. The extent of the regulation depends on the jurisdiction.
The work undertaken by the broker will depend on the depth of the broker's service and liabilities. Typically the following tasks are undertaken:
The banks have used brokers to outsource the job of finding and qualifying borrowers, and to outsource some of the liabilities for fraud and foreclosure onto the originators through legal agreements.
During the process of loan origination, the broker gathers and processes paperwork associated with mortgage law real estate.
A mortgage broker is normally registered with the state, and is personally liable (punishable by revocation or prison) for fraud for the life of a loan. A loan officer works under the umbrella license of an institution, typically a bank or direct lender. Both positions have legal, moral, and professional responsibilities and obligations to prevent fraud and to fully disclose loan terms to both consumer and lender. Agents of mortgage brokers may refer to themselves as "loan officers".
Mortgage brokers must also hold individual and company licenses through the Nationwide Multi-State Licensing System and Registry (NMLS). The goal of NMLS is to employ the benefits of local, state-based financial services regulation on a nationwide platform that provides for improved coordination and information sharing among regulators, increased efficiencies for industry, and enhanced consumer protection. Loan officers who work for a depository institution are required to be registered with the NMLS, but not licensed.
Typically, a mortgage broker will make more money per loan than a loan officer, but a loan officer can use the referral network available from the lending institution to sell more loans. There are mortgage brokers and loan officers at all levels of experience.
Mortgage brokers can obtain loan approvals from the largest secondary wholesale market lenders in the country. For example, Fannie Mae may issue a loan approval to a client through its mortgage broker, which can then be assigned to any of a number of mortgage bankers on the approved list. The broker will often compare rates for that day. The broker will then assign the loan to a designated licensed lender based on their pricing and closing speed. The lender may close the loan and service the loan. They may either fund it permanently or temporarily with a warehouse line of credit prior to selling it into a larger lending pool.
The difference between the "Broker" and "Banker" is the banker's ability to use a short term credit line (known as a warehouse line) to fund the loan until they can sell the loan to the secondary market. Then they repay their warehouse lender, and obtain a profit on the sale of the loan. The borrower will often get a letter notifying them their lender has sold or transferred the loan. Bankers who sell most of their loans and do not actually service them are in some jurisdictions required to notify the client in writing. For example, New York State regulations require a non servicing "banker" to disclose the exact percentage of loans actually funded and serviced as opposed to sold/brokered.
Brokers must also disclose Yield spread premium while Bankers do not. This has created an ambiguous and difficult identification of the true cost to obtain a mortgage. The government created a new Good Faith Estimate (2010 version) to allow consumers to compare apples to apples in all fees related to a mortgage whether you are shopping a mortgage broker or a direct lender. The government's reason for this was some mortgage brokers were utilizing bait and switch tactics to quote one rate and fees only to change before the loan documents were created. Although ambiguous for the mortgage brokers to disclose this, they decide what fees to charge upfront whereas the direct lender won't know what they make overall until the loan is sold.
Also See: Predatory lending & Mortgage fraud
Sometimes they will sell the loan, but continue to service the loan. Other times, the lender will maintain ownership and sell the rights to service the loan to an outside mortgage service bureau. Many lenders follow an "originate to sell" business model, where virtually all of the loans they originate are sold on the secondary market. The lender earns fees at the closing, and a Service Release Premium, or SRP. The amount of the SRP is directly related to the terms of the loan. Generally, the less favorable the loan terms for the borrower, the more SRP is earned. Lender's loan officers are often financially incentivized to sell higher-priced loans in order to earn higher commissions.
The largest secondary market by mortgage volume are Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation, commonly referred to as Fannie Mae and Freddie Mac, respectively. Loans must comply with their jointly derived standard application form guidelines so they may become eligible for sale to larger loan servicers or investors. These larger investors could then sell them to Fannie Mae or Freddie Mac to replenish warehouse funds. The goal is to package loan portfolios in conformance with the secondary market to maintain the ability to sell loans for capital. If interest rates drop and the portfolio has a higher average interest rate, the banker can sell the loans at a larger profit based on the difference in the current market rate. Some large lenders will hold their loans until such a gain is possible.
The selling of mortgage loans in the wholesale or secondary market is more common. They provide permanent capital to the borrowers. A "direct lender" may lend directly to a borrower, but can have the loan pre-sold prior to the closing.
Few lenders are comprehensive or "portfolio lenders". That is, few close, keep, and service the mortgage loan. The term is known as portfolio lending, indicating that a loan has been made from funds on deposit or a trust. That type of direct lending is uncommon, and has been declining in usage. An example of a portfolio lender in the US is ING Direct.
Mortgage bankers and banks are not subject to this cost reduction act. Because the selling of loans generates most lender fees, servicing the total in most cases exceeds the high cost act. Whereas mortgage brokers now must reduce their fees, a licensed lender is unaffected by the second portion of fee generation. This is due to the delay of selling the servicing until after closing. Therefore, it is considered a secondary market transaction and not subject to the same regulation.
Predatory mortgage lending is when a dishonest financial institution willfully misleads or deceives the consumer. Some mortgage consultants, processors and executives of mortgage companies have been involved in predatory lending.
Some signs of predatory lending include:
Another unethical practice involves inserting hidden clauses in contracts in which a borrower will unknowingly promise to pay the broker or lender to find him or her a mortgage whether or not the mortgage is closed. Though regarded as unethical by the National Association of Mortgage Brokers, this practice is legal in most states. Often a dishonest lender will convince the consumer that he or she is signing an application and nothing else. Often the consumer will not hear again from the lender until after the time expires and then they are forced to pay all costs. Potential borrowers may even be sued without having legal defense.
In Ontario there is a difference between a Mortgage Broker and a Mortgage Agent, although they perform much of the same tasks.
While the terms Mortgage Broker and Mortgage Agent are similar, and Mortgage Brokers and Mortgage Agents fulfill many of the same functions, it is important note that there is in fact a difference.
According to Canadian Mortgage Trends the main difference between a Mortgage Broker is that, "...a mortgage broker is a firm or person licensed to deal in mortgages and employ mortgage agents" while "A mortgage agent is an individual authorized to deal in mortgages on behalf of a mortgage broker.
While many attribute these functions to a Mortgage Broker, "A mortgage agent is generally someone who finds the best mortgage for each client based on that client’s income, credit, and property profiles."
The role of a mortgage broker is to mediate business between clients and lending institutions, which include , Building society and credit unions.
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The broader distinction between consumers and businesses adopted within the MCD is, in some respects, contrary to the current UK framework, and as a result some exemptions previously enjoyed in the UK will be phased out. One example is where borrowers or relatives of borrowers will occupy less than 40% of a property, which is currently not considered regulated business; by 2016, such borrowers will be considered consumers. These transactions will therefore come to be regulated. ‘Accidental landlords’ to be regulated by 2016. Commercial Trust. 2014-09-08.
It is speculated that, because borrowers’ applications are stress-tested on the strength of their ability to make the monthly repayments, increasing numbers of borrowers are opting for mortgage terms exceeding the traditional 25 years. This results in lower repayments but a higher overall interest bill, as well as a longer period servicing debt. Could a 35-year mortgage be the best way onto the housing ladder? Homes 24. 2014-05-01
According to official figures from the Office for National Statistics (ONS), the percentage of mortgages under 25 years in length fell from 95% to 68% between 2002 and 2012.House Price Index, December 2013: Annual Tables 20 to 39 XLS. Retrieved from ons.gov.uk
In 2019, the Mortgage Broker market share has grown to 59% of the mortgage market, however, the future viability of the sector has been cast into doubt due to recommendations of the Hayne Royal Commission. Commissioner Kenneth Hayne has recommended that lenders cease paying upfront and trailing commission to Brokers and instead, that the consumer pays a yet-to-be determined upfront fee for service. The industry (led by the FBAA and MFAA) leveraged the 2019 Federal Election campaign to convince the Liberal Government to back down from introducing an upfront fee-for-service model. These efforts have been described as a 'textbook case of successful grassroots lobbying'.
Mortgage brokers are now regulated by the Australian Securities & Investments Commission. The new national consumer credit protection legislation includes a licensing regime and responsible lending obligations. Mortgage brokers are also required to be a member of an external dispute resolution provider such as the Credit ombudsman service Limited (COSL). Furthermore, some lenders require accredited brokers to be a member of an industry body such as the Finance Brokers Association of Australia (FBAA) or Mortgage & Finance Association of Australia (MFAA). These industry associations demand that brokers complete at least 25-30 of continued professional development each year to maintain their skills and knowledge.
Although mortgage brokers are paid commissions by the lenders this does not alter the final rate or fees paid by the customer as it may in other countries. Mortgage brokers do not have the ability to charge the customer a higher or lower rate and in return obtain a higher or lower commission.
In the event that the loan is paid back by the borrower within 24 months of the loan settlement, mortgage brokers are charged a "clawback" fee by the lenders since the loan is considered "unprofitable". The amount is usually 0.66% of the loan amount for loans paid back in the first 12 months and 0.33% for loans paid back in the next 12 months. When this happens the mortgage brokers are sometimes able to charge the customer the amount if they hold written authority to do this. Mortgage brokers don't like to be liable for the fee, but in some case it is unrecoverable. Keep in mind that a standard home loan in Australia is contracted over a 30-year term, with the average loan life being approximately 4–5 years.
A study undertaken by Chan & Partners Consulting Group (CPCG) shows that the mortgage brokering industry is still largely a new concept to the Singapore financial consumers. However this will set to change as more consumers realize that taking up a housing loan with the mortgage broker does not increase the consumer's cost at all, and can in fact aid them in making a more informed decision.
Mortgage brokers in the country do not charge borrowers any fee, rather profits are made when the financial institutions pay the broker a commission upon successful loan disbursement via the broker's referral.
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