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The mortgage business is a complicated and ever-changing industry. It is important that you understand how the mortgage market works and how the lenders make their profit. In doing so, you will gain an appreciation of loan programs and why certain loans are offered by certain lenders.
INSTITUTIONAL LENDERS
The first broad category of distinction is institutional versus private. Institutional lenders include commercial banks, savings and loans, credit unions, mortgage banking companies, pension funds, and insurance companies. These lenders generally make loans based on the income and credit of the borrower, and they generally follow standard lending guidelines. Private lenders are individuals or small companies that do not have insured depositors and are generally not regulated by the federal government.
PRIMARY VERSUS SECONDARY MARKET
First, these markets should not be confused with first and second mortgages. Primary mortgage lenders deal directly with the public. They “originate” loans, that is, they lend money directly to the borrower. Often referred to as the “retail” side of the business, lenders make a profit from loan processing fees, not the interest paid on the loan.
Primary mortgage lenders generally lend money to consumers, then sell the mortgage notes (in large packages, not one at a time) to investors on the secondary mortgage market to replenish their cash reserves.
The largest buyers on the secondary market are the Federal National Mortgage Association (FNMA or “Fannie Mae”), the Government National Mortgage Association (GNMA or “Ginnie Mae”) and the Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”). Private financial institutions such as banks, life insurance companies, private investors, and thrift associations also buy notes.
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