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© Cengage Learning 1
CHAPTER 18
STRATEGIES FOR GENERATING
RESIDENTIAL LOANS
OBJECTIVES OF CHAPTER
Upon successful completion of this chapter, students should be able to;
Identify those attributes which attract customers to mortgage
lenders
Identify the requirements for successful mortgage lending
Describe the importance of the origination function and what it
consists of
Explain the reasons for some of the recent developments in
serving the public in the requests for mortgage loans
Distinguish between the retail and wholesale methods of loan
origination
Explain the advantages and disadvantages of the retail and
wholesale methods
Understand some of the benefits and drawbacks to the different
mortgage origination channels
© Cengage Learning 2
I. Introduction
II. The First Step-Focus on the Applicant
A. Measuring Customer Satisfaction
B. What Attracts Consumers?
C. The Most Effective “Tool” in Attracting
Mortgage Applications
D. Convenience for the Applicant
E. Consumer Stress in Applying for a Mortgage
Loan
F. Application Information Booklet
G. Tracking the Progress of the Application
H. How Loyal Are Mortgage Borrowers?
III. Requirements for a Successful Mortgage Lending
Operation
A. Trained Personnel
B. Program Offerings
C. Competitive pricing
D. Targeted Marketing
E. Loan Demand
F. Origination Channels
IV. Retail Loan Origination
A. Purchase vs. Refinance Transactions
B. Purchases—Importance of the Real Estate Agent
C. Refinances—Rates, Reputation, and
Convenience
D. Commission Loan Agents
E. Functions Performed by Retail Lenders
F. Origination Income
G. FASB Statement No. 91
H. Points and Interest Rate Trade-offs
I. Retail Branch Offices
J. Expected Mortgage Loan Volume
V. Wholesale Loan Origination
A. Advantages and Disadvantages of Wholesale
Lending
B. Mortgage Brokers and Loan Correspondents
C. Functions Performed
D. Table Funding
E. Yield Spread Premiums
F. What Motivates the Third-party Originator?
G. Fees and Premiums
H. Affinity Groups
I. Quality Control
VI. Internet Lending
Teaching Tips
Discuss how a new mortgage loan officer can best
prepare and educate themselves to be an effective
loan officer.
Which best practice listed in the J.D. Power survey
do you think is most important and why?
What aspect of the mortgage origination process do
you think is the most stressful to the consumer and
why? What would you do to alleviate this if you
were the loan officer?
What loan programs do you think are most
important to your market area at this time?
In what ways has wholesale lending helped the
mortgage industry?
How do you think the use of the Internet for loan
origination helps or hinders the industry?
What do you think the future holds for this
industry?
We covered so many aspects of the mortgage world.
What role in the industry could you best see
yourself?
© Cengage Learning 3
SUGGESTED TRUE/FALSE QUIZ
1. In today’s market place, all a lender has to do is advertise that it
is offering mortgages and it will get all of the business it can
handle.
2. The largest originator of residential mortgages over the past
couple of years was thrifts
3. The realtor is considered among the most important factors in a
consumer’s selection of a mortgage lender for a purchase
transaction.
4. The retail method of loan origination is the traditional method
familiar to most consumers
5. A commissioned mortgage loan agent typically earns a 50 basis
points commission.
6. Loan demand is driven more by demographic issues than
interest rates.
7. The average percentage of yearly originations that are
refinancing is about 50 percent.
8. According to a J.D. Power survey, providing the applicant
proactive updates is a best practice by successful mortgage
© Cengage Learning 4
originators.
9. Table funding occurs when a broker closes a mortgage loan
with funds belonging to an acquiring lender.
10. Yield spread premiums are illegal under RESPA.
© Cengage Learning 5
SUGGESTED MULTIPLE CHOICE QUESTIONS More than one
answer may be correct, select all that are correct. (Correct answers are
italicized.)
1. For any residential mortgage lender to be successful, certain elements
must be in place including:
a. Loan demand
2. The highest loan origination volume in U.S. history is:
a. $1 trillion
3. Variable-rate first mortgage loan (ARMs) originations vary depending
on interest rates. The highest percent of total year originations for
ARMs was:
a. 20 percent
© Cengage Learning 6
4. According to the Mortgage Bankers Association, all of the below
factors are important in attracting customers except:
a. Low interest rates
5. In today’s evolving primary mortgage market, the four strategies or
methods of origination include:
d. Real estate agent origination
SUGGESTED SHORT ESSAY QUESTIONS
1. Discuss the impact FASB #91 has on the pricing of residential
mortgage loans.
ANSWER: The students should understand what FASB #91 requires
1. An increase in secondary mortgage market activity
2. An increase in options available to borrowers that
© Cengage Learning 7
2. Identify the various methods of loan origination. Discuss the pros and cons
of each method.
ANSWER: In today's rapidly evolving primary mortgage market, four
strategies or methods of loan origination are used:
Retail loan origination (Pro: traditional method still used by
Wholesale loan origination (Pro: lower cost of production,
Combination of retail and wholesale loan origination
Internet or online is rapidly becoming a fourth strategy - at the
3. The Mortgage Bankers Association of America estimates that each
residential mortgage loan mortgage bankers originate has a cost of
about $1,700 per loan. Why is the cost so high? How can a mortgage
lender overcome this initial loss?
ANSWER: These figures apply specifically to mortgage bankers but
are also probably applicable to all mortgage lenders that pay loan
© Cengage Learning 8
Lenders who face this situation are able to continue in business
because they are often able to make a slight profit on marketing the
loans when the loans are sold in the secondary mortgage market.
4. What features or attributes attract consumers to a particular mortgage lender?
ANSWER: The three "attributes" considered the most important by
mortgage lenders in this survey in attracting consumers who are new to an
area were: (1.) Referral by real estate sales agents, (2.) Low interest rates on
5. Using the information from the Demographic Forces in Housing section of
Chapter 3- Mortgage Lending and the Economy and information in this chapter,
develop a targeted marketing strategy for a group of your choice. Include loan
programs, marketing campaigns, and advertising points (features/benefits) which
target your group.
© Cengage Learning 9
ANSWERS TO ORAL DISCUSSION POINTS
The discussion points at the end of each chapter are intended for oral
discussion in class. Suggested answers/points to emphasize to the
questions are found below.
1. Discuss the five keys for a successful lending operation.
ANSWER: For any residential mortgage lender to have a successful first
mortgage program five elements must be in place. These five elements are:
Loan demand
Product offerings
2. List and discuss the advantages and disadvantages of retail versus
wholesale mortgage origination.
ANSWER: The students should list most of the following:
wholesale lending is generally a lower cost way of loan origination;
allows the lender to move quickly in and out of markets that are hot;
© Cengage Learning 10
3. What functions are normally performed by a retail loan originator?
ANSWER: The retail mortgage lender directly performs the following
origination functions:
Completes application with borrower
Verifies all employment, income, and deposits
4. Many mortgage lenders compensate their originators by commission – what
is the typical commission for a loan officer – how is it calculated?
ANSWER: The commission normally given to a retail mortgage loan
originator is 1/2 of 1 percent of the loan amount (or, as normally stated, 50
basis points). This commission is payable of course, only if the loan can be
© Cengage Learning 11
5. How do mortgage originators offset their expenses in producing a residential
mortgage loan? What are the expenses in originating a residential loan?
ANSWER: Most retail mortgage lenders charge an application fee or
origination points or both to offset some or all of the expenses incurred in
performing the various origination functions. If the lender is charging an
application fee, that fee is usually large enough to pay for the credit report,
Estimates for the cost of processing a residential mortgage loan (not
