LA VERNE, California, Dec. 18, 2017 — I’m looking for my first home, which I be financing. My problem is, I am confused over all the different kinds of home lenders out there — mortgage bankers, mortgage brokers, my local bank, etc.. Can you help me make sense of the differences?
Honestly, I don’t know why there are so many different kinds of lenders. If I were at all cynical, I would tend to believe all this market confusion is part of a deeper marketing strategy to overwhelm the consumer so at some point they just throw up their hands and leave everything up to “the experts” — and you know how that usually turns out. To be fair, however, some of the confusion arises from the constant differentiation taking place in our capitalistic marketplace. Lenders are always trying to one-up one each other and show why their lending platform or niche is best (We’re the best; forget the rest!).
Okay, now that caveat is out of the way, let’s get started and try not to over-complicate things.
If you bank at, say, Chase or Bank of America or Wells Fargo (also known as money-center banks), and you inform the teller that you need information about a home loan, you’ll likely be sent to the home loan desk or be asked to schedule an appointment with the branch’s home loan officer. It’s that simple. If you obtain a loan through one of these institutions, your purchase is regarded as a “retail” transaction, no different than if you purchased an ice cream cone at 31 Flavors. Your loan provider is a retail lender.
Many big banks also have wholesale lending departments. That simply means that if they can’t sell you a home loan product in one of their branches, they want you to buy it from another financial institution offering their products. This other institution (let’s call it Lender B) doesn’t specialize in home loans, but it doesn’t want to send you, their customer, back at the door, so as a convenience and a courtesy and a way to make a little extra money, it takes all of your loan information and starts the loan origination process. But the loan you obtain is actually funded by the bigger bank’s wholesale operation (unit or channel).
Now let’s say this same smaller (Lender B) institution is a doing a pretty brisk business in providing home loans and decides it now wants more recognition for all the loans it’s making in that other institution’s name. It’s thinking, “Why should Wells Fargo get all the credit!” Therefore, Lender B negotiates a corresponding relationship with Wells Fargo. Wells Fargo, looking to grow another channel of business, outside of its retail and wholesale operations, could also initiate the relationship. Either way, Lender B makes the loan in its name, then Wells Fargo agrees to buy it after the loan closes. If, however, any of these loans, in this correspondent arrangement, are later found not to meet the standards of Wells Fargo or one of Wells Fargo’s investors (the secondary market to whom Wells Fargo eventually sells the loan), Lender B has to buy the loan back, which could delay the entire home purchase transaction, making the homebuyer very upset.
Instead of walking into a large bank, you visit a mortgage broker. Unlike a retail, wholesale or correspondent lender, mortgage brokers don’t lend out money directly. Rather, acting as a middleman or your agent, they shop different lenders to help you find the best price (loan rate, terms, points, etc.). It’s a great idea on the surface, but, generally, the broker, in business to make money, has to tack on a fee for his time and service. So, after this markup takes place, your savings will be minimal, if any.
Mortgage bankers, despite the term “banker” right in their title, are not bankers. They are non-banks. So where does their money come from to lend to people like you who want to buy homes? Great question. Their money comes from huge lines of credit provided by warehouse lenders (usually large money-center banks, who have so much money that they need a warehouse, not a vault, to store it — just kidding). Like retail lenders (also known as direct lenders), large mortgage bankers often boast wholesale lending and correspondent lending departments. The key difference here, mortgage bankers get their money from banks or other deep-pocketed institutions, whereas retail lenders (banks) are the bank (they lend their depositors’ money back out). That said, large mortgage bankers, the ones big and ambitious enough to also support wholesale and correspondent lending departments, often refer to their own branches, supported by their own loan officers, as “the retail side of the bank” — even though, I repeat, THEY ARE NOT BANKERS!
I hope these explanations help, but it’s takes some sorting out. Lines blur between each group. In the end, choose the institution and lender that offer you the best value and service, along with the most transparency.
Colleen is a longtime Realtor serving the San Gabriel Valley from Claremont to La Canada. If you have a question for Colleen or want more information about buying, selling or investing in real estate, call Coll at 909.374.4744.