What it means
Unlike a bank, a mortgage company does not hold savings accounts. It makes money by creating loans, charging fees and selling the loans on, and it relies on credit lines from banks to supply the cash it lends.
This model is common in the United States, where non-bank lenders account for a large share of new home loans. The sequence is straightforward.
The company takes the borrower's application, checks their finances, approves the loan and provides the funds at closing. It then sells the loan, often to a government-backed buyer or an investor, and uses the proceeds to repay its credit line and fund the next loan.
Some mortgage companies also keep the servicing, which means collecting payments, managing escrow and dealing with late payers. Servicing generates a steady fee income and can be bought and sold as an asset in its own right.
Others sell the servicing along with the loan and focus only on origination. Regulation applies to mortgage companies, even though they are not banks.
They must hold licences, follow rules on fair lending and disclosure, and in many places meet minimum capital requirements. These rules protect borrowers and help to ensure that the company can honour its commitments.
The key risk is funding. Because the company depends on short-term credit lines and on investors willing to buy loans, a sudden freeze in those markets can leave it unable to operate.
Borrowers should consider the financial strength of the company, especially if it will also service the loan. For borrowers, the sensible checks are simple.
Confirm that the company is licensed, ask who will service the loan, and compare the full cost including fees rather than only the rate. A reputable company will explain each of these clearly and put the answers in writing.
In practice
Real-world examples.
Example
A buyer who is self-employed finds that her bank declines her application. A mortgage company with more flexible rules approves her, using bank statements to confirm income. She pays a slightly higher rate but is able to buy her home.
Example
A mortgage company receives 600 applications in a busy month and funds 400 of them. It sells the loans to investors within a few weeks, using the cash to repay its credit line. The finance team tracks how long loans stay on the line, since each extra day costs interest.
Example
An investor looks at buying a controlling stake in a mortgage company. She studies its funding lines, the volume of loans it sells and the servicing portfolio it owns. She concludes that its servicing income is stable and offsets the swings in origination, which supports a higher price than the loan volumes alone would justify.
Formula
Calculation
Warehouse Interest Cost = Loan Amount x Annual Rate x Days Held / 360
Suppose a mortgage company funds a $300,000 loan using a warehouse line charging 7% a year, and holds the loan for 30 days before selling it. Interest cost = 300,000 x 0.07 x 30 / 360. First, 300,000 x 0.07 = $21,000 a year. Then 21,000 x 30 / 360 = $1,750, which is the funding cost the company must recover from fees and the sale price.Case study
Seen in the real world.
Brookfield Home Funding is an illustrative, fictional mortgage company that funded $240,000,000 of loans a year. When interest rates rose quickly, applications fell by 40%, and revenue dropped with them.
The chief financial officer cut costs, but also noted that the company's servicing portfolio of $1,500,000,000 kept paying steady fees. That income covered much of the fixed overhead while origination was weak.
The board decided to hold more servicing in the long run rather than selling it, accepting less cash today for steadier income later. The illustrative lesson is that a mix of origination, which swings with rates, and servicing, which is steady, can protect a mortgage company through a downturn.
Watch out
Common mistakes.
- Assuming a mortgage company is a bank, when it generally does not take deposits and relies on credit lines and loan sales for its funds.
- Assuming the company that makes your loan will keep servicing it, when servicing is often sold to another firm.
- Choosing a lender only on the advertised rate, when fees, speed and service quality also affect the real cost.
Questions
People also ask.
What is the difference between a mortgage company and a bank?
A bank takes deposits and can lend them out, while a mortgage company funds loans with borrowed money and typically sells them.
Are mortgage companies regulated?
Yes, they must usually be licensed and follow lending and disclosure rules, even though they are not banks.
Can a mortgage company offer better rates?
Sometimes, because they specialise in lending and compete on price, but you should compare offers from several lenders.
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