What it means
A mortgage banker originates loans, meaning it takes the application, assesses the borrower, and provides the funds at closing. To pay for these loans, it generally borrows from a warehouse line, a short-term credit facility secured by the loans themselves.
That allows the banker to fund many loans without tying up large amounts of its own cash. After closing, the banker typically sells the loan on the secondary market to investors or to government-backed agencies.
Cash from the sale pays off the warehouse line and the banker starts again. This cycle of lending and selling is the core of the business model.
Revenue comes from several places. There are origination fees paid by the borrower, a gain on the sale of the loan when it is sold at a premium to its face value, and sometimes income from continuing to service the loan, which means collecting payments and handling the account.
The costs include staff, technology, compliance, and the interest on the warehouse line while loans wait to be sold. The main risk is timing.
If interest rates rise between the day the banker promises a rate to a borrower and the day the loan is sold, the loan may be worth less than planned. Bankers manage this with hedging, which means taking financial positions designed to offset such losses.
For a borrower, the practical difference from a broker is that a mortgage banker makes the lending decision itself and controls the process. That can mean faster closings and more consistency, though the choice of products is limited to what the banker and its investors offer.
In practice
Real-world examples.
Example
A mortgage banker in a mid-sized city funds 120 loans in a month using a warehouse line. It sells the loans to a large investor within three weeks of closing. The sale proceeds repay the line, and the firm keeps the margin.
Example
A homebuyer chooses a mortgage banker over a broker because she wants one company to handle the application, approval and funding. The banker closes in 25 days and keeps her informed throughout. She pays a slightly higher fee than the cheapest quote she had found.
Example
A banker sees interest rates rising sharply and worries that loans in its pipeline will lose value before they are sold. It hedges part of the exposure with financial contracts that gain value when rates rise. The hedge reduces the loss on the pipeline when rates do move up.
Formula
Calculation
Net Profit per Loan = (Sale Price of Loan - Amount Funded) + Origination Fees - Cost to Originate
Suppose a banker funds a $400,000 loan and sells it to an investor at 102% of face value, which is 400,000 x 1.02 = $408,000. The gain on sale is 408,000 - 400,000 = $8,000. The borrower pays $2,000 in origination fees, and the cost to originate the loan is $7,000. Net Profit per Loan = 8,000 + 2,000 - 7,000 = $3,000.Case study
Seen in the real world.
Redcliff Home Loans is an illustrative, fictional mortgage banker that funded $600,000,000 of loans in a strong year using a $50,000,000 warehouse line. Its finance director watched the average time a loan sat on the line, which was 21 days.
When investors slowed their purchases, that average stretched to 45 days. Interest on the warehouse line rose, and the company's margin on each loan fell sharply even though volumes were unchanged.
The finance director arranged a second buyer and tightened the sale process, bringing the holding time back to 25 days. The illustrative lesson is that a mortgage banker's profit depends not only on how many loans it makes but on how quickly it can sell them.
Watch out
Common mistakes.
- Confusing a mortgage banker with a mortgage broker, when a banker funds loans itself and a broker only arranges them with other lenders.
- Assuming the banker keeps your loan for its life, when most loans are sold soon after closing.
- Believing the sale of your loan changes its terms, when the interest rate and payment stay the same under the original agreement.
Questions
People also ask.
How does a mortgage banker make money?
It earns fees from borrowers and a gain when it sells loans for more than it cost to create them, and may also earn income from servicing.
What is a warehouse line?
It is a short-term credit facility that lets the banker fund loans before it sells them, and it is repaid from the sale proceeds.
Will my payments go to a different company after the sale?
Possibly, because the loan or only the servicing may be transferred, but the terms of your loan do not change and you will receive notice.
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