Industry Overview

The purchase of a home is generally the largest acquisition consumers make in their lifetime. Most consumers do not have the financial wherewithal to purchase a home outright and must obtain a real estate loan to finance the transaction. There are a wide range of loan products available to meet the varied financial needs of consumers.

The real estate lending industry has grown substantially over the past few years and is approaching $4 trillion in outstanding loan balances. The total real estate debt in the country is the largest in the world, second only to the United States government. The residential real estate lending industry is comprised of two distinct areas: that of the primary market and the secondary mortgage market. There are a host of other ancillary entities that service and support the real estate lending process as well. We will discuss each of these areas below.

Primary Mortgage Market

The primary mortgage market covers the entire process a consumer encounters in obtaining a real estate loan. The process includes the consumer's completion of a loan application form, validation of credit and property information, loan underwriting by the lender, and the closing of the mortgage loan. Generally, the consumer's primary contact throughout this process is the loan officer. The loan officer acts as the consumer's navigator through the primary market "maze" and provides assistance in:

• Identifying appropriate loan programs, based on the consumer's needs
• Completion of the loan application form
• Obtaining documentation necessary to validate credit and property value
• Compiling supporting information in a package suitable to submit to lenders
• Communications between the lender and the consumer

The loan officer may work for a mortgage broker, a mortgage banker, or a financial depository institution. Each of these entities is described below. The loan officer for Hughes Federal Credit Union is not paid a percentage of the fees collected by the lender.

Historically, the process of obtaining a loan has taken several weeks to complete. In the future, this time frame is expected to improve dramatically as the application process, credit validation, and loan underwriting become more automated. Some industry experts believe that in the near future the primary market process will be completed in hours and days rather than weeks and months.

The Major Players

The major players in the primary market are mortgage brokers, mortgage bankers, and depository financial institutions.

Mortgage Brokers:
One of the major providers of real estate loans ismortgage brokers. They have access to a wide range of mortgage lending products through relationships with mortgage bankers and depository institutions. Because mortgage brokers are approved through multiple lenders, they have the flexibility to place most loans.

Mortgage brokers employ loan officers, who, as described above, work directly with the consumer in obtaining home financing. They assist the consumer in completing the application and loan selection process and direct them to suitable lenders to fund the mortgage. Occasionally, mortgage brokers have relationships with mortgage bankers which allow them to underwrite and fund the loans.

Mortgage brokers charge a fee to assist the borrower with loan placement. The fee is paid to the broker when the loan funds. Mortgage brokers are typically regulated by state agencies, such as the Department of Real Estate.

Mortgage Bankers:
Another major participant in the primary market is mortgage bankers. Mortgage bankers are financial intermediaries that review the creditworthiness of the borrower, provide funds for the loan, and quickly sell the mortgages into the secondary mortgage market. There are two kinds of mortgage banking operations, retail and wholesale. Retail mortgage bankers employ loan officers that assist borrowers with the application and loan selection process. Wholesale mortgage bankers do not employ loan officers. They obtain their business directly from mortgage brokers. There is no difference in fees charged by mortgage brokers accessing lenders on a wholesale basis and those charged by retail lenders who use their own loan officers.

Mortgage bankers typically do not have the resources to portfolio loans. Therefore, they sell the mortgages they fund to secondary market investors, such as Fannie Mae or Freddie Mac, or transfer the loans to an affiliate company, such as a financial depository institution, to be held in portfolio. Although the loan is sold shortly after funding, mortgage bankers may elect to service the loan on behalf of the secondary market investor acquiring it. Servicing includes collecting the monthly payments from consumers and remitting the funds to the appropriate investors. Mortgage bankers receive a fee for this service directly from the secondary market investors that ranges from .25% to .5% per year.

Sometimes mortgage bankers will sell the loan servicing rights to another mortgage banker or financial institution. When this occurs, borrowers are notified that the loan servicing has been sold and will receive instructions on where to make their monthly payments.

Mortgage bankers are regulated by state agencies, such as the Department of Real Estate or the Department of Corporations. Mortgage bankers that are subsidiaries of financial depository institutions are regulated by their parent company's primary regulatory body.

Financial Depository Institutions:
Historically, the dominant sources of mortgage loans are depository institutions, such as savings and loan associations, savings banks, commercial banks, and credit unions. Savings and loan associations, in particular, have provided a large percentage of mortgage loans to consumers over the years. These depository institutions gather funds from their customers through checking, savings accounts, and certificates of deposits (CD's). These funds are then used to make loans. In addition to using customers' deposits to make loans, many borrow from the Federal Home Loan Bank, the Federal Reserve Bank, or other depository institutions and use the proceeds to make loans to their customers. Financial depository institutions are strictly regulated by government agencies, such as the Federal Reserve Board, the Office of Thrift Supervision, the Office of Comptroller Currency and other regulatory agencies.

Secondary Mortgage Market

The secondary market revolves around the acquisition and sale of newly closed and seasoned mortgage loans between sophisticated investors or mortgage lenders. Before the development of the secondary mortgage market, savings and loan associations and regional banks were the dominant sources of mortgage loans. The development of the secondary mortgage market was the result of government sponsored insuring and guarantee programs, such as the Federal Housing Administration (FHA) and the Veterans Administration (VA), created during the Great Depression. In 1938, the Federal National Mortgage Association (FNMA), a subsidiary of the Reconstruction Finance Corporation, was developed to provide a secondary mortgage market for FHA loans; it subsequently purchased VA loans as well.

Over the past 20 years, the secondary mortgage market has changed significantly. With the creation of these entities, as well as the Federal Home Mortgage Corporation(FHLMC), liquidity for residential mortgage loans has increasingly come from sources, such as pension funds, insurance companies, and investors in the national capital markets. The total dollar amount of outstanding residential mortgage loans exceeds any public or private financing type in the domestic United States, except the federal government.

Mortgage loans are sold individually or in pools of loans, such as mortgage-backed securities. When loans are sold in the secondary market, monthly payments are made to the original mortgage lender or to a designated mortgage servicer. Sometimes the loan servicing is sold simultaneously with the sale of the mortgage loan, or at a later time.

Ancillary Services

There are many ancillary services that support the mortgage lending process. Some of the more visible are:

Real Estate Broker and Real Estate Sales Associate:
These professionals assist consumers in the buying and selling of real estate. The real estate professional is usually the first contact consumers have when deciding on a real estate loan, who in turn will refer clients to a mortgage professional.

Title Company
Title companies perform a title search on the property and issue a title policy for the lender and the purchaser to insure that there is a valid mortgage lien against the property and the title is clear.

Closing Agent
This entity facilitates the closing of a mortgage loan by acting as an impartial third party. The closing agent can be an escrow company, an attorney or title company agent depending on the region.

Appraiser
This professional evaluates the market value of the real estate.

Credit Reporting Agency
These companies research the credit records of consumers and consolidate the findings in a credit report. They have access to databases that store credit information on most consumers in the country. Additionally, they search public records for derogatory items that may have been filed against a consumer such as judgements, bankruptcies, and liens. Frequently, credit reporting agencies will research other items, such as place of employment, banking relationships, and previous residency.

Private Mortgage Insurance (PMI) Company
When the loan exceeds 80% of the value of the property, lenders usually require private mortgage insurance that insures the lender in the event a borrower defaults and the property ends up in foreclosure. Usually, borrowers pay for this insurance as part of the monthly payment.

Hazard Insurance Company
Lenders require hazard insurance that covers the outstanding loan on the property. In most cases, the lender is the loss payee on the policy and will receive the proceeds on a claim. The proceeds will then be used to pay for repairs.