Most banks will have their own origination staff and originate their own mortgages. They also may choose to maintain the servicing of the loans that they originate after closing. It is common however, that a good portion of the Notes in the servicing portfolio may be held by Fannie and Freddie. Banks generally will underwrite their own loans under the guidelines of Fannie Mae and Freddie Mac. They may also choose to keep a certain portfolio of loans for a target market that they are pursuing. In these cases, they may have their own set of guidelines that they underwrite to with the understanding that these loans will never be sold to the agencies. Due to the volatile economic nature of mortgage banking many banks also may choose to source out some or all of their mortgage originations to mortgage bankers and brokers to avoid the overhead that comes from running a large origination, processing and underwriting staff.

Brokers, who are selling their loans to the banks, will take the bank’s rate, add in their mark-up, and that will be the final rate to the consumer. Depending on the broker and the type of loan, that mark-up can equate to anywhere from one to five points, with the average being 1 ½ to 2 points. Generally, government mortgages such as FHA and VA will have a higher markup. This is because there is a bit more work that goes into these for the broker and they also know unfortunately that consumers of these types of loans generally are less likely to shop.

Generally, brokers have access to very competitive rates from the bank on the wholesale side since they do not cost the bank any overhead. All that the broker does is add in the cost of his own overhead to the rate when they price. Since the broker will usually carry quite a bit less overhead than the larger banks this could potentially result in the smaller brokers having a lower rate than the large banks. Be careful though, as these lower rates may result in a slower turn time for approval on the loan, increased documentation, and a reduced service level. This is because the broker has to go back and forth with the final lending institution to get authorization on everything, which can eat up valuable time when you are trying to meet a closing date.

Mortgage bankers are a bit of a hybrid between banks and brokers. Like a bank, they generally have their own underwriters on staff and will originate, process, underwrite, and close the mortgage application in-house. It is only after the closing that they will sell off the securitized note and servicing of the loan to earn their revenue. Unlike a bank and like a broker, however, they can choose from various banks and secondary market options to make sure that they are getting access to the best rates for their clients. In fact, in some cases, mortgage banking companies will sell directly to the agencies cutting out the banks altogether.