Mortgage Bankers vs. Banks and Direct Lenders

Comparing Mortgage Bankers to Banks and Direct Lenders

Understanding how mortgage bankers compare to banks and direct lenders is crucial when shopping for a mortgage. However, finding unbiased information is difficult. False myths and stereotypes dominate the mortgage landscape. It’s important to separate fact from fiction.

Below is a breakdown of a few factors that can influence a borrower’s decision of where to obtain their mortgage. A sober comparison of the facts reveals both distinct differences and surprising similarities between mortgage bankers, banks and direct lenders.

Loan Servicing

Almost all mortgages are sold on the secondary market. Gone are the days of big banks and lenders servicing home loans for entire terms. The only variable now is when the loan is sold.

  • Banks and direct lenders often service loans for the first year in order to collect interest payments. Then, they sell the loans
  • Bankers never service loans. They are typically sold by the lender immediately after closing

Rates and Fees

Mortgage transactions are never free. Borrowers pay for their mortgage through the rate, fees or a combination of the two. It’s critical to recognize that rates and fees are interrelated. One directly impacts the other. Here are the facts:

Banks and Direct Lenders

  • They are limited to offering only their mortgage rates
  • Historically, they have been able to charge fewer fees than mortgage bankers because the bulk of their profit is tied to the rate:
    • They collect interest payments when they service loans
    • They collect a Service Release Premium (SRP) when they sell loans. The SRP is largely affected by the interest rate. Therefore, they have a financial incentive when setting the rate. Most banks bump their rates to increase profitability
    • It’s not uncommon for banks and direct lenders to charge fees in addition to what they earn on the rate
    • They are not required to disclose the SRP to borrowers

Mortgage Bankers

  • Historically, they have been able to offer lower mortgage rates because they can shop among multiple wholesale lenders. They also have access to wholesale rates with no profit built in
  • They never collect interest payments or profit by selling loans on the secondary market. Instead, they are paid a fee for the service they provide. Mortgage Bankers can earn their fee in one of two ways:
    • Borrower Paid: The borrower pays an origination fee to the mortgage banker and obtains the lowest wholesale mortgage rate available
    • Lender Paid: The borrower pays zero origination fees in return for a slightly higher mortgage rate. The wholesale lender then pays the mortgage banker a yield spread premium (YSP)
    • They cannot charge an origination fee and collect YSP. It’s strictly one or the other
    • They are required to disclose the YSP to borrowers

Home Loan Options

Today, borrowers have fewer home loan options than in years past. Mortgage bankers, banks, and direct lenders generally have access to the same basic home loan programs. The most popular are Conventional, FHA, and VA.

  • The difference is that banks and direct lenders don’t always offer all programs. And they are often inflexible with qualifying guidelines
  • Mortgage bankers have access to a variety of different wholesale lenders. Each offers different programs, niches and guideline enhancements. Mortgage bankers can also access specialized portfolio programs through wholesale lenders. They can provide several home loan options for their customers and approve certain loans that banks deny

Together, mortgage bankers, banks and direct lenders provide borrowers with a clearly defined choice. Understanding the differences allows borrowers to make educated decisions about where to obtain a mortgage. Borrowers should base their decision on what’s best for their individual situation.