A mortgage originator is either an institution or an individual who works with borrowers to secure a home loan. They are pivotal in the home-buying process, ensuring that the transaction is efficiently handled from application to closing. Mortgage originators can be either mortgage brokers or mortgage bankers, and they operate within the primary mortgage market in partnership with underwriters and loan processors to gather necessary documentation and usher the loan file through approval.
Key Takeaways
- Mortgage Originator Defined: An entity or individual collaborating with an underwriter to finalize a home loan for the borrower.
- Types of Mortgage Originators: This includes retail banks, mortgage brokers, and mortgage bankers.
- Primary Market Role: Mortgage originators create loans in the primary mortgage market but frequently sell them into the secondary mortgage market.
- Revenue: They profit through origination fees and the difference between borrower interest rates and premiums paid by the secondary market.
Understanding a Mortgage Originator
A mortgage originator is integral as the first player in the mortgage creation chain. They include retail banks, mortgage bankers, and mortgage brokers. Banks typically utilize their traditional funding sources to close loans, whereas mortgage bankers might use a warehouse line of credit. These originations are quickly sold into the secondary mortgage market, although some mortgage originators might opt to aggregate loans before selling multiple mortgages as a package.
There is an inherent risk when originators hold onto a mortgage after an interest rate has been locked in by the borrower. If the mortgage isn’t sold immediately, shifts in interest rates could alter the value in the secondary market, impacting the originator’s profits. Often, a mortgage calculator can illustrate how varying rates affect monthly payments.
Mortgage originators can hedge their mortgage pipelines against interest rate fluctuations. A best efforts trade is a transaction method for selling individual mortgages, which eliminates the need for certain hedging strategies. Smaller entities typically use this type of trade.
What Distinguishes Mortgage Originators?
- Retail Banks versus Mortgage Bankers: Both role types differ mainly in the source of funds and risk strategies.
- Interest Rate Risk Management: How they handle changes in interest rates significantly impacts profitability.
Average Loan Size Facts
- $453,000: Average loan size in 2022, according to the Mortgage Bankers Association.
Primary vs. Secondary Mortgage Market
The primary mortgage market is where the borrower and the mortgage originator come together to engage in a home loan transaction. It is at this stage that actual funds and legal transactions occur. Lenders on this stage are highly diverse, a far cry from a consolidated market often only appearing fragmented and robust with several thousand smaller entities coupling the larger firms that capture the bulk of the originations.
Once originated, the servicing rights to mortgages occasionally get sold from one institution to another in the secondary mortgage market. This secondary market’s transactions occur after a mortgage is legally binding, significantly driven by government-sponsored enterprises like Fannie Mae and Freddie Mac. These enterprises often package pools into mortgage-backed securities (MBS) for trade.
Estimating the percentage of originations facilitated by specific mortgage originators can be skewed, particularly as immediate sales into the secondary mortgage market may lead to double-counting originations.
Different Types of Mortgage Originators
Two predominant types of mortgage originators are mortgage bankers and mortgage brokers. The fundamental distinction lies between their operational and financial structure.
- Mortgage Bankers: Operate within lending institutions, dealing directly with borrowers to fund loans at closing with their institution’s money. They predominantly serve within retail banks and credit unions.
- Mortgage Brokers: Serve as intermediaries from the borrowing party, handling applications, checking credit and income, carrying underwriting processes, and eventually fishing the loan to lending institutions for closing and funding.
Related Terms: underwriters, loan processors, interest rate, mortgage-backed securities.
References
- Mortgage Bankers Association. “Mortgage Applications Decrease in Latest MBA Weekly Survey”.
