Mortgage Bank Definition Functions How Does It Work

Mortgage Bank Definition

Explanation

In countries like the United States, any individual, corporation, or financial institutionFinancial InstitutionFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. read more can carry out mortgage financing and mortgage servicing activities by taking the required license from the federal institute and state housing boards.

Mortgage banks have the specialized skill of creating a product that can help them in selling off their loan products and will be able to hedge cash flowsHedge Cash FlowsA cash flow hedge is an investment method to control and mitigate the sudden changes in cash inflow or outflow to the asset, liability, or the forecasted transactions. It can arise due to interest rate changes, asset price changes, or foreign exchange rates fluctuations.read more. As and when the banks lend money against the mortgage, it gives birth to two products –

Mortgage loansRight to service such mortgage loans

Such mortgage loans sell-off in theA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more secondary marketsSecondary MarketsA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more and retain the right to service them. Servicing such a loan is always inherent in most such loan products. The bank earns fees from loan origination as well as loan servicing.

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Features of Mortgage Bank

Mortgage banks have specialized skills in mortgage loans.Their main work areas are mortgage loan origination and servicing those loans.Their main source of revenue is loan origination fees (that they charge while processing the fees) and loan servicing fees (that they demand from other players for purchasing the right of servicing the loan).They do not accept deposits from the public.They function based on their capital and do not need to depend on others to get funds.They call themselves mortgage lenders rather than bankers to avoid being considered normal, ordinary banks.The size of such banks differs from case to case. Some work at the federal level, and some operate at state-specific geography.

Functions

Below are the specific functions being undertaken by a mortgage bank –

#1 – Solicit Business

The major work of such a bank is to identify the individuals or corporations who need funds and own some assets that they can offer as security.

#2 – Perform Financial Analysis

Their major role is to verify the financial stability of their customers and verify the market scenario to predict the trends.

#3 – Perform Financial Counselling

High net worth individualsHigh Net Worth IndividualsA high net worth individual possesses liquid assets worth $1 million to $5 million. They are also referred to as HNWIs. In order to qualify for HNWI status, the individual’s liquid assets must be readily available in their bank or brokerage accounts. The assets must be accessible and easily converted into cash.read more and corporations who have excess funds or require frequent funding consult mortgage banks about how to invest or get their money at an optimum cost.

#4 – Loan Origination

One of the major tasks of such banks is to provide loans, termed as ‘Loan Origination’ in this field. First, they verify the documents and assess the repayment capacity and the valuation of their assets. Then, based on that, they determine the loan’s value that can land on them.

#5 – Servicing of Mortgage

Such banks also purchase the right to service the mortgage loan and earn the servicing fees.

Mortgage Banker vs Mortgage Broker

Advantages

The rate at which loans are offered is highly affordable.Mortgage costs them less as they use their capital.

Disadvantages

One will have to repay a much higher fund than the amount borrowed due to the long funding tenure on borrowing the funds from them.

Conclusion

A mortgage bank is a specialized institute that works in a highly structured way of performing the function of lending money. Their main aim is to reduce the mortgage cost and enhance the lending rate to maximize profitabilityProfitabilityProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company’s performance.read more by earning the yield spread premium. Therefore, they need to follow the stringent rules set up by the Federal Reserve and file various periodic forms prescribed under law.