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Mortgage Basics - Mortgage Brokers Vs. Mortgage Bankers: Which Do You Choose?

by David Reed

Can your mortgage broker get you the best interest rate on the planet? Or will you use a mortgage banker to provide your residential financing? Maybe your credit union could offer the best rates. Doesn't anyone get their mortgage from their own bank, anymore?

According to the Mortgage Bankers Association, in 1999 9.7 million mortgages were issued for properties with one to four units. While the most recent figures are unavailable, in 1997 says the mortgage banking group 56 percent of all loans were originated by mortgage companies, 25 percent came from commercial banks, and 18 percent were from thrifts, largely savings and loan associations. So-called "others" (including credit unions) were responsible for less than 1 percent of all loan originations.

These numbers have changed over the years. While thrifts once dominated the home mortgage market, their share of loan activity has fallen from almost 50 percent in 1980 to 18.3 percent in 1997. The big winners have been mortgage companies which now dominate the marketplace.

Okay, so what's the difference between a mortgage broker and a mortgage banker?

In general terms, the distinctions look like this:

A mortgage broker, says the National Association of Mortgage Brokers, is "an independent real estate financing professional who specializes in the origination of residential and/or commercial mortgages." There are, says NAMB, approximately 20,000 mortgage banking firms nationwide.

In essence, mortgage brokers know where the money is. Rather than lending their own funds, they lend money from other sources such as banks, pension funds, insurance companies, and savings and loan associations. They attempt to find competitive mortgage pricing from various mortgage companies, insert their markup, and ask for that profit at closing. The theory is that because a mortgage broker has access to multiple lenders, they have the ability to shop for the best rates.

A mortgage banker is different. A mortgage banker, says the Mortgage Bankers Association of America, is "an individual, firm or corporation that originates, sells and/or services loans secured by mortgages on real property." In other words, there are cases where a mortgage banker lends its own money, and other cases where it acts like a mortgage broker and lends money from other sources.

I have experience from both sides of the aisle.

I learned the residential lending business in 1989 as a mortgage broker in Southern California while for the last 6 years I've worked as a mortgage banker.

As a broker, I would receive an endless stream of rate sheets from various wholesale lenders, each offering rates for given mortgage products. Every day, I would pore through the rate sheets and determine who had the best rate. I soon determined that most lenders, while not having the exact same rates, were still very close -- sometimes within 1/100th of a percent of one another.

Now, as a mortgage banker, I watch my pricing every day, and I'm always going to be competitive. Most lenders are. They have to be to stay in business. The difference here is that the mortgage will be issued from my company's bank account.

So, okay, I know the question you want to ask: Is it better to get a loan from a mortgage broker or a mortgage banker? Fess up David, which is better?

My answer is, all things being equal, there is no difference.

If you can obtain the same loan at the same rate with the same fees, it really doesn't matter if your loan is brokered or not. It's not important that someone uses their own money to fund your loan or if they get it elsewhere as long as you get what you were promised.

Which to choose? Just go on the Internet or pick up the phone and contact mortgage brokers, mortgage bankers, commercial banks, S&Ls, credit unions, and any other financing source you can find. See who has the best program for you and see how rates and terms compare.

In the past few years we've seen that mortgage bankers, banks, S&Ls, and credit unions often act as mortgage brokers. Conversely, many mortgage brokers now carry their own bank lines of credit to act as a mortgage bankers. When they make mortgage, they will then immediately sell the loan to another mortgage company, many times right at your closing table.

What's happening is that the distinctions among traditional lending sources are beginning to blur, and it matters not where you get your mortgage, just as long as you get what's best for you.