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© Cengage Learning 1
CHAPTER 4
THE MORTGAGE LENDERS
OBJECTIVES OF CHAPTER
Upon successful completion of this chapter, students should be able to:
Explain which mortgage lenders are most important in
residential mortgage lending as originators and which are
investors.
Explain how actions taken by the federal government aided in
the development of the various residential mortgage lenders.
Identify the sources of funds for each of the lenders.
Compare and contrast the activities and investment
philosophies of the various lenders.
Describe how commercial banks, mortgage companies and the
two thrifts are organized and regulated.
Explain why credit unions believe they must get involved in
residential mortgage lending.
Outline the types of risks lenders mortgage lenders must
manage to protect their own investments.
© Cengage Learning 2
I. Introduction
A. Holders of Residential Debt
II. Mortgage Bankers and Mortgage Brokers
A. Mortgage brokers (not to be confused with
mortgage bankers)
B. Mortgage broker fees
C. Mortgage bankers (not to be confused with
mortgage brokers)
D. Not a Portfolio Lender
E. Development of Mortgage Bankers
G. Government Programs
H. Beginning of Modern Mortgage-Lending
Standards
I. Modern Mortgage Bankers
J. Organization and Regulation
K. Financing the Mortgage Banker
L. Sale of Commercial Paper
M. Line of Credit and Warehousing
N. Mortgage Banking Today
III. Commercial Bank
A. Historical Development
1. State-chartered banks making real estate
loans 50 years before national banks
2. FDIC created in 1933
B. Organization and regulation
1. Federal or state charters
2. Commercial loans favored over mortgage
loans
C. Mortgage lending activity
1. Deposits and loans generally short-term
2. Active in construction lending
3. Federal Reserve System
4. Lending terms and limits regulated by
Feds and states
5. Recent expansion of residential mortgage
lending
D.Federal Reserve Regulations
Discuss how the third party lenders evolved from the
increased consumer need for mortgages.
If you were to get a job as a mortgage loan officer, what
type of institution would you want to work in and why?
How would you advise a client to choose what type of
lending institution they should use to obtain a mortgage?
The FHA has played a big part in mortgage lending since
its inception, but its role has changed in the past few
decades.
Is anybody familiar with how obtaining a residential loan
from the FHA differs from a conventional lender?
The instructor should find some relevant news stories
about the FHA and its role in the demise of the mortgage
industry.
Discuss how the FHA should play a part in mortgage
lending if Fannie and Freddie are revamped.
Discuss how the banking industry changed over the years
to include more lending than saving in its portfolios.
Discuss how technology and the global economy have
changed the lending landscape in America.
Is it a change for the positive or will the overspending and
lending lead to the demise of the American economy?
© Cengage Learning 3
Do you think that the merging of the small local banks has
helped or hurt the industry?
Does anybody belong to a credit union? Would you choose
to go to your credit union for a mortgage or car loan over a
regular bank? Why?
IV. Savings Institutions
A. Historic Development
1. Number of S&Ls peaked in 1929
2. Half failed in 1930s
3. Numbers are now well under 1,000
B. An Institution in Trouble
1. The Tax Reform Act of 1986
2. Deregulation and other problems of the 1980s
C. Organization and Regulation
1. May be state or federally chartered
2. May be mutual or stock association
3. FIRREA – end of an era
4. Office of Thrift Supervision and Dodd –Frank
Reform
5. Savings institutions today
V. Savings Banks (SBs)
A. Development
1. Historical development similar to S&Ls
2. Never spread far from northeastern part of country
B. Organization and Regulation
1. Originally all were mutual but now about 50% are
stock.
2. Members of FDIC and deposits insured up to
$250,000
C. Mortgage Lending Activity
1. Have greater experience making other types of
loans in addition to residential mortgages
2. Sustained significant losses in last ten years
© Cengage Learning 4
SUGGESTED TRUE/FALSE
VI. Credit Unions
A. Development
1. The first credit union in the United States was
under state charter in New Hampshire in 1908
Currently 50% are federally chartered under the
Federal Credit Union Act of 1934.
2. Experienced consolidation of institutions to a
total of fewer than 10,000
3. Activity of credit unions is largely similar to
banks
B. Mortgage Lending Activity
1. Forced into mortgage lending by change in
competition in consumer lending
2. Rapid increase in mortgage lending activity
VII. Primary Mortgage Market Risks
A. Interest rate risk
B. Prepayment risk
C. Liquidity risk
D. Collateral risk
E. Compliance risk
F. Portfolio Risk
G. Lender portfolio Retention Asset/Liability
Management
Do you think that the merging of the small local banks has
helped or hurt the industry?
Does anybody belong to a credit union? Would you choose
to go to your credit union for a mortgage or car loan over a
regular bank? Why?
Risk has played a huge role in the collapse of the real
estate industry as well as the mortgage industry. Discuss
the different types of risk listed in the chapter and rate the
significance of each as a cause.
© Cengage Learning 5
QUIZ
1. The thrift is the largest holder of residential mortgage debt in 2010.
2. The mortgage company is a financial intermediary, but not a
depository.
3. About 50 - 60 percent of each year’s residential originations are made
by mortgage bankers and brokers.
4. Commercial banks deposits and loans are generally short-term.
5. Mortgage bankers and brokers impose their own restrictions on
residential mortgage lending done by them. .
6. The mortgage broker is a third party provider of mortgages.
7. Credit unions are limited as to whom it can grant a mortgage loan.
8. The mortgage broker borrows money to lend on mortgages by selling
commercial paper, mortgage loans or warehousing mortgages.
9. Thrifts lead all mortgage lenders in originating conventional loans
10. Mortgage bankers have no direct government supervision..
11. Mortgage bankers use warehouse lines to originate mortgages whereas
mortgage brokers do not.
© Cengage Learning 6
12. Mortgage bankers obtain their funds from commercial banks and Wall
Street.
13. Credit unions are a meaningful originator of residential mortgage
loans.
14. Interest rate risks refer to changes in market rates compared to the
note rates.
MULTIPLE CHOICE QUESTIONS. More than one answer may be
correct – select all correct answers. (Correct answers are italicized.)
1. Which organization insures the deposits of commercial banks and
Savings banks?
a. Office of Thrift Supervision
2. Which of the following mortgage lenders is not a depository
institution?
a. Savings Banks
© Cengage Learning 7
3. Name the mortgage lender that typically specializes in
construction loans:
a. Thrifts
4. This lender can only make mortgage loans to a specified group of
people:
a. Commercial Bank
5. Investments in residential mortgage loans contain the following risks:
a. Credit risk
SUGGESTED SHORT ESSAY QUESTIONS.
© Cengage Learning 8
1. Give an example of how the federal government aided in the
development of each of the following mortgage lenders: federally-
chartered commercial banks, and mortgage companies.
ANSWER: Commercial banks: students may list either the Federal
Reserve Act, passed in 1913, which permitted federally- chartered banks
2. Explain why mortgage companies depend on commercial banks as a
source of funds.
ANSWER: Mortgage companies are not depository institutions.
Mortgage companies must use closed loans as collateral and draw on a
ANSWERS TO ORAL DISCUSSION POINTS
The discussion points at the end of each chapter are intended for oral
© Cengage Learning 9
discussion in class. Suggested answers/points to emphasize for the
questions are found below.
1. Explain which mortgage lenders are most important in residential mortgage
lending as originators and which as investors.
ANSWER: Mortgage brokers and mortgage bankers are important as
originators but do not invest in mortgages. Commercial banks both originate
2. Discuss the major difference between mortgage brokers/bankers and
portfolio lenders.
ANSWER: Unlike other mortgage lenders, a mortgage banker does not
intentionally hold mortgages for its own benefit. Since a mortgage banker
3. The mortgage broker is a major originator of residential mortgages.
Explore the inherent conflict a mortgage broker faces when originating a
mortgage loan.
ANSWER: The biggest conflict a mortgage broker faced was increasing a
© Cengage Learning 10
borrower’s mortgage interest rate in order to gain form a higher commission
(yield spread premium). The Dodd-Frank bill ended this practice in 2011 by
4. Why are mortgage bankers tied so closely to commercial banks?
ANSWER: An alternative used by mortgage bankers to obtaining funds to
be loaned to residential mortgagors is by drawing on a line of credit with a
commercial bank. This process is usually a part of a unique function
© Cengage Learning 11
5. Which mortgage lender originates the majority of FHA/VA mortgage
loans? Why is this the case?
ANSWER: Mortgage bankers originate over 50 percent of yearly
6. How has the number and organization of mortgage lenders changed over
the past ten years?
ANSWER: There has been an enormous amount of consolidation for both
the mortgage lenders and the debt holders. Fannie and Freddie have both
