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Difference between Lenders and Brokers PDF Print E-mail

 


 Broker

Lenders and brokers both perform a variety of loan origination tasks, which include finding and advising borrowers, qualifying borrowers, taking loan applications, checking credit, processing, underwriting, verifying employment and assets, and arranging loan funding. This article provides a summary of the distinction between the two, then describes our own mini-correspondent program which we use to allow brokers to become lenders so they can close loans in their own name and make more money on the "back-end" of the transaction.

 

Mortgage Brokers

 

A mortgage broker is an intermediary who brings together a borrower and a lender and arranges the financing for a fee; mortgage brokers are not lenders. They are not authorized to provide final loan approval, nor do they disburse money. Brokers generally originate and process loans, while a third party underwrites, funds, closes, and takes possession of the mortgage. Technically, nobody buys loans from brokers, because brokers don’t close loans.

 

Prior to January 10, 2014, Brokers typically charged their fees as points between 2% and 3% on the “front-end” or primary side of the mortgage funding process. Their fees have to be disclosed on the Good Faith Estimate. However, after January 10, 2014, front-end fees and points are capped at 3% on mortgages equal to or greater than $100,000 for a loan to be eligible for treatment as a Qualified Mortgage (QM). Investors in the secondary market generally prefer Qualified Mortgages, so QM’s are the norm. This means that brokers’ compensation is now limited to whatever amount can be charged under the 3% cap.

 

The 3% cap includes certain fees paid to affiliates, mortgage originator compensation paid directly or indirectly by the consumer, compensation paid by a lender to a loan originator other than an employee of the lender, upfront charges paid by the borrower to the lender or its affiliates, and amounts imposed by secondary market investors and passed through to borrowers to compensate for credit risk. The cap excludes any compensation paid, per transaction, by a mortgage broker to an employee of the broker and compensation paid by a lender to its loan officers.

 

Brokers won't notice much difference in their operation when they become a "mini-correspondent" with us; the main difference is that you will sign the closing documents in your name as the lender, and you will recieve a gain on sale on the "back-end" when we transfer the loans to our investors. Instead of getting a "yield spread premium," you will get a larger "gain on sale" that is not itemized on the closing docs.

 

Correspondent Lenders

 

A correspondent lender is a mortgage lender that originates and funds home loans in their own name. Generally correspondent lenders take ownership of the mortgage until they sell it to their investor. As a result, they may have to provide short term payment servicing, but can collect the interest on the mortgage until the investor takes possession of the title. Shortly after the loan closes, the correspondent sells the loans to larger mortgage lenders (investor) who may service the loans and may also sell them to the secondary market.

 

There are many variations of a correspondent lender, but the most common is a mortgage banking firm that provides funding from a warehouse line. Correspondent lenders (or mortgage bankers) typically underwrite and approve their own loans, and lend the money being borrowed. Correspondents are usually financed by another wholesale lender or bank that issues a warehouse line of credit. Generally, a wholesale lender requires a correspondent to enter into a written correspondent lending agreement before the correspondent may originate loans for sale to the wholesale lender. The prices correspondent lenders deliver to borrowers are those of the wholesale lenders, plus a markup. Most warehouse lenders have a "haircut" so that the correspondent may receive only 97% or 98% of the loan amount from their warehouse; the correspondent is required to fund the remainder. Furthermore, most warehouse lenders charge a higher rate of interest for the warehouse line than the mortgage note rate, and warehouse funds are tied up until the investor pays the correspondent for the mortgage.

 

Correspondent lenders are the primary interface with borrowers, performing all steps in the mortgage origination and funding processes. They generally originate and deliver loans pursuant to underwriting standards set by their warehouse lenders or investors upon advance commitment on price. In addition to soliciting borrowers directly, correspondent lenders may receive mortgage applications and documents from mortgage brokers. Not all correspondents perform underwriting services; instead, some rely on the investor or third party fulfillment service to underwrite loans and prepare closing documents.

 

Disclosure rules differ for brokers and lenders. For example, let's say the wholesale lender quotes a price of zero points on a 5% loan to a broker or correspondent. If the broker or correspondent wants to make 2 points on the deal (2% of the loan amount), he quotes a price of 5% and 2 points to the borrower. As a broker, the 2 points appears on the Good Faith Estimate (GFE) as a "Broker Fee", and as a lender, it appears as "Points". Not much difference between the broker and correspondent in this case.

But the wholesale lender also offers, in addition to 5% and zero points, 5.25% loan with a 2 point rebate. Still looking to make 2 points, the broker or correspondent’s price to the borrower would now be 5.25% with zero points. As a broker, the 2 points has to be disclosed. A correspondent lender, in contrast, does not disclose the 2 point rebate at all. The correspondent made a 5.25% loan at zero points, then received a 2 point profit when the investor purchases the loan, but that profit is nobody’s business but his.

 

Mini-correspondents

 

Mini-correspondents are correspondent lenders that originate loans and have limited net worth and risk. Our mini-correspondent warehouse funding program allows you to continue originating loans and providing face-to-face customer service, while having a larger role in closing and funding your mortgage loans. You set your own rates and fees and determine your income. You become more self-sufficient. We have everything needed to get you started.

 

You originate, process, and close the loans in your own name, but you don’t underwrite the loans and prepare the closing documents unless you get delegated approval from us. Our Team performs the underwriting and closing doc preparation. We wire the funds to the closing agent at closing, then you assign the mortgage to our warehouse bank who sells it on the secondary market to our pre-approved investors.

 

Since a Mini-correspondent is a lender, you must ensure that you have the appropriate license to operate in your state or jurisdiction as a residential mortgage lender. Other than that, and the fact that the loan will be closed in your name, your operation will be almost identical to what it is now as a broker.

 

Bensuit money 2efits

 

The primary benefit to being our mini-correspondent is that you can make more money than you normally would as a broker by receiving a generous portion of our margin when the loan is sold in the secondary market to investors. This can be especially helpful to brokers limited to the relatively new 3% cap imposed by Dodd-Frank rules on the closing costs associated with mortgage of $100,000 or more (other caps are set for smaller mortgages). Fees paid to the broker by the lender count towards the cap, but wholesale fees don't. As a mini-correspondent, there is no more need for Disclosure of Service Release Premiums (SRP) on the HUD-1 Settlement statement as required by RESPA. Since you are closing the loan in your own name, your company is exempted from RESPA to disclose the SRP's, unlike table funded transactions. The profit margin our mini-correspondents receive when our Team sells the loan to the investor includes SRP’s you may have received previously if you sold your loans to investors. Another big plus for our program is the industry-low net worth requirement of only $50,000.  We have no haircuts on our warehouse so you receive 100% of the mortgage amount. Our bank takes possession of the mortgage after the loan is closed and they receive a complete set of closing documents along with an allonge and deed assignment. Your company gets to control the entire settlement and funding date of the loan closing. This eliminates the worry of promised wires from your table funding lenders, which rarely arrive on time. Having warehouse funding enables your company to grow at a faster pace. Growth is limited without the use of warehouse funding.

 

 General Approval Requirements (see Application and Checklist):

 

Correspondent application and checklist

Copy of state licenses (if applicable)

Copy of drivers license (to open bank checking account)

Resumes of principal officers, underwriters, etc.

FNMA, GNMA, FHLMC, FHA or VA approvals

Net worth of $50,000 or more

(2 Years) corporate audited & most recent interim statements

(2 Years) corporate federal tax returns (personal if LLC)

Names of other warehouse lenders

Copy of articles of incorporation and bylaws

Board resolution approving business transactions with out Team

Quality control procedures

Copy of E & O and fidelity bond insurance policy at $300,000 each

Banking references to include names and addresses

List of secondary market investors

Production history (summary)

Brief company history with list of all loan officers

 

 

When the loans are funded, our bank(s) requires several items:

 

> A marketable first lien mortgage with unrestricted title

> A Qualified Mortgage

> No fraudulent documents

> Complete document packages

> Accepted QA/QC procedures have been followed

> Complete closing package with no trailing documents “hanging out”

> Allonge and Original Assignment of Deed of Trust to transfer ownership

 

The loans are approved by our Team prior to funding and specific closing instructions are given to the title companies; funds are wired directly to the closing agent at closing. The mortgage is often pre-sold prior to closing with a written commitment from an approved third party investor. After closing, the mortgage is sold to our investor, and the mini-correspondent's portion of the sales margin (2% to 4% - depending on mortgage rate and loan type) will be deposited directly into the correspondent's checking account which we set up in our bank(s).

 

Our underwriting and closing Team work with you closely to make sure the banks' requirements are fulfilled.

 

 

Last Updated on Tuesday, 13 October 2015 11:02
 

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