SIC 6162 Mortgage Bankers and Loan Correspondents
SIC 6162
This industry covers establishments primarily engaged in originating mortgage loans, selling mortgage loans to permanent investors, and servicing these loans. They may also provide real estate construction loans.
522292
Real Estate Credit
522390
Other Activities Related to Credit Intermediation
The mortgage loan industry differs from other industries in its passivity: whereas new products and services can create new markets in other industries, the mortgage industry remains at the mercy of homeowners and buyers, who almost never buy on impulse. Instead of creating new markets, mortgage bankers must respond to existing markets and anticipate marketplace changes, transforming their services in reaction to larger societal forces, such as population demographics and interest rates. This passivity forces the industry to be dynamic, constantly shifting to meet new demands, such as rising rates of first-time homebuyers, and take advantage of new opportunities, such as e-commerce. At its core, the mortgage industry remains solid because home ownership represents an enduring aspect of American life.
When average interest rates fell to historic lows in the early 2000s, the industry saw an unprecedented spike in refinancing activity, which fueled a record volume of mortgage originations in both years. These low interest rates also sparked growth in new transactions, particularly by the growing segments of first-time homebuyers, low-income buyers, minorities, and immigrants. According to the Mortgage Bankers Association (MBA), in 2003, mortgage originations totaled $3.81 trillion, of which 68 percent were refinancing. As interest rates began to climb slowly during 2004 and 2005, total mortgage originations fell to $2.653 trillion, of which 44 percent were refinancing transactions.
As liaisons, mortgage bankers are more than just loan brokers, because they maintain a responsible presence from the time mortgage loans are created until they are paid in full. The mortgage banker functions in a continuum extending from the seller/builder of the property to the seller's agent, to the mortgage borrower, to the mortgagee (the mortgage banker), and to the mortgage investor. Mortgage bankers specialize in the origination or production of mortgage loans for sale to the secondary mortgage market. Many mortgage lenders make or buy loans, while some sell loans, and others service loans. Mortgage bankers link the three functions.
The housing finance system in the United States includes many private and public institutions and several levels of market activity. The mortgage lending/investment process involves the provision of housing credit to borrowers by institutions and individuals who hold housing loans in their portfolios. However, a number of institutions may come between the ultimate investors, and the characteristics of the mortgage asset may be transformed along the way as insurance and guarantees are attached and as securities replace the original mortgage loans.
Residential mortgage loans are made (originated) in primary markets where lenders and borrowers conduct business. Borrowers get mortgage credit in these markets mainly from depository institutions or mortgage banking companies. Since the 1930s, mortgage loans made in primary markets typically have been long-term, fixed-rate instruments with level payments that pay off (amortize) the principal balance over the term of the loan. However, new types of mortgage instruments emerged recently to serve the various needs of borrowers and investors. Most of the new mortgage instruments provide for adjustable interest rates, graduated payment schedules, or some combination of these features.
Institutions operating in primary mortgage markets may hold the mortgages they originate, adding them to their asset portfolios. In many cases, however, originators sell their loan production on secondary markets, thereby replenishing their supplies of loanable money. Transfers of outstanding mortgages among mortgage investors also take place in secondary markets.
Sales of mortgage loans from originators to investors inevitably involve some cost, but such transfers are often necessary for the effective functioning of the housing finance system. Secondary market transactions may be needed to correct interregional imbalances in the supply of and demand for mortgage credit, or to move mortgage assets from one type of institution to another within the same market area. The latter need arises within a system characterized by specialization and division of labor. One type of institution may perform a mortgage banking function, specializing in mortgage origination and servicing and selling assets to investors who choose not to perform these functions. Such a division of functions can be encouraged by federal or state regulations governing the activities of various types of institutions.
There are several types of loan instruments available to individual and institutional investors:
Historically, 30-year fixed-rate mortgages have been the loan instrument of choice for many borrowers. The changing conditions in the mortgage market, however, coupled with sharp fluctuations in interest rates, have increased the demand for shorter maturities, more interest-sensitive loans, and nontraditional mortgage instruments.
Because of the thrift crisis in the late 1980s, lenders began offering adjustable rate mortgages. Lenders, buffeted by interest rate risk, looked to shift the risk to the borrower. In exchange, they offered borrowers a lower initial rate. What was once an instrument designed to keep housing affordable during periods of high interest rates turned into an interest rate gamble for a growing number of borrowers. Borrowers that opt for fixed-rate loans anticipate stable or increasing interest rates. If they are wrong, they can refinance later. Borrowers that choose adjustable plans believe that rates will decline. In its brief history, the ARM has shown resilience as a loan product and unexpected risk for borrowers and lenders.
These instruments have been available for years, but have been marketed aggressively only during high interest rate periods. This type of mortgage vehicle gives the borrower the benefit of a low initial rate with the option to refinance to a fixed-rate mortgage at about half the typical refinance cost. The convertible ARM may be attractive to lenders with loan-servicing portfolios, since they would be less likely to see refinance business go elsewhere. If the borrower switches to a fixed-rate mortgage when rates are low, however, the lender will have a portfolio of low-rate, fixed-rate loans.
Fixed-rate mortgages with terms shorter than the traditional 30-year instruments have become tremendously popular since the early 1980s. They are expected to become increasingly popular as borrowers see the value of their mortgage interest deductions decline as they move into lower tax brackets. Moreover, during periods of low inflation, borrowers can pay down their principle in cheaper dollars. The 15-year loan historically had rates between 40 and 50 basis points (a basis point is equal to 0.01 percent) below the 30-year loan, and has lower overall financing costs. The higher monthly costs make the 15-year loan available mainly to affluent borrowers. This has helped keep default rates low, making it a good intermediate term asset for portfolio lenders and attractive to investors. Industry estimates place default rates on 15-year loans at about half that of 30-year mortgages.
Bi-weekly mortgages are similar to 15-year or 30-year mortgages except that the borrower pays half of the scheduled monthly payments every two weeks. This creates the equivalent of 13 monthly payments a year, resulting in a much faster pay-off. A 30-year mortgage would be paid off in 19 years with this instrument. Virtually all bi-weeklies are fixed-rate loans, and much of the bi-weekly volume is generated by refinancing. Borrowers take advantage of declining rates to lock in a fixed-rate, shorter term loan with slightly lower monthly payments. Lenders target sophisticated, second- and third-time homebuyers for this product. The loan usually is tied to a checking or deposit account from which payments are debited directly. Delinquency rates on this instrument are extremely low...
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