What's the Difference Between a Mortgage Broker and a Mortgage Bank?

Tim Sickinger, Principal, Ladd Financial   

Tim, can you tell us the difference between a mortgage bank and a mortgage broker?

There are actually three — let me simplify it a bit — but there are three entities that lend mortgage money in this kind of a market. First is very simply a bank, your corner bank; you go down, you put money in the bank, and they turn around and lend the deposits back out to individuals as a mortgage loan. They, obviously, keep that loan on their books, they don't sell it, they want to earn an interest rate — usually a higher interest rate than they're paying you on your deposits — but it's a very simple way to explain how mortgages get done. That's the first way.

The second way is a mortgage bank. Mortgage banks actually originate mortgages and close them in their own name. For example, if Ladd Financial were a mortgage bank, you would close and sign your mortgage documents, and they would say Ladd Financial owns your mortgage. But a mortgage bank will turn around and immediately sell that mortgage to, usually, a large Wall Street firm or a conduit who's probably already underwritten and agreed to buy the loan prior to us closing it. That requires — a mortgage company actually has to have a pretty large line of credit; so they're closing thirty loans a month, and they might need five or six million dollars a month just to fund the loans they're closing. And then they immediately sell them and get that five million dollars back. So it's a little bit different, because it allows mortgage companies to take a little bit more interest-rate risk; there's certainly inherently more risk to a mortgage bank because you are holding the mortgage for a period of time. That could be as little as a half a day to as long as a month. In many cases, if the loan goes bad, the mortgage bank might have to buy it back, keep it on their line and try to resell it, at a maybe much higher interest rate, which would make them take a loss. So it's a lot more risk involved for them.

And finally, a mortgage brokerage firm, which is what I'm doing now. Mortgage brokerage companies don't fund loans in their own names. They actually fund the loan at whatever banks agree to do the mortgage for a customer. Most mortgage companies, mine included, we have wholesale relationships with many lenders. I think my company has over forty banks right now we do business with. Wholesale meaning, like when you go down and buy your bread from the grocery store, you pay a certain price. The grocery store, however, pays a cheaper price and makes a profit on it.

Tim Sickinger is a Principal at Ladd Financial, a mortgage lending firm in Westport, CT.